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BREXIT: Triggering of Article 50 does not justify expediting CJEU reference in tax case

Out-Law Legal Update | 10 May 2017 | 10:06 am | 5 min. read

LEGAL UPDATE: The Upper Tribunal has decided that service by the UK of Article 50 notice to leave the EU does not justify expediting a reference to the Court of Justice of the European Union (CJEU) in a tax case. 

The president of the Upper Tribunal (UT) has decided that the service of notice by the UK under article 50(2) of the Treaty on European Union of the UK's intention to withdraw from the EU does not justify expediting a reference to the Court of Justice of the European Union (CJEU) in a tax case.

The trustee of a pension scheme had applied to the UT for an immediate reference to the CJEU of EU law questions which it argued needed to be answered before the UT could decide an appeal.

In June 2016 the First-tier Tribunal dismissed the trustee’s appeal against HMRC's refusal to repay withholding tax which had been withheld in respect of manufactured overseas dividends that had arisen in connection with stock lending arrangements. The trustee appealed the decision to the UT, but the appeal has not yet been heard.

On commencement of the UT stage the trustee applied to the UT for an immediate referral of certain issues to the CJEU before the full hearing of the appeal. The trustee said that the government has announced its intention that the UK's exit from the EU will bring an end to the jurisdiction of the CJEU in the UK and so any delay in referring the questions on EU law could result in the trustee being deprived of its ability to seek the assistance of the CJEU in resolving its EU-law based claim.

HMRC argued that the UT should hear the appeal first, before deciding whether to make a reference to the CJEU and the triggering of Article 50 did not justify the Tribunal in departing from its usual practice.

A hearing of the trustee's application for an immediate reference took place before the UT on 10 March 2017.

Subsequent to the hearing, the UK government published a white paper on 30 March 2017 which included confirmation of the government's intention that leaving the EU will bring an end to the jurisdiction of the CJEU in the UK. The wording of certain paragraphs of the decision in the trustee's case implies that it will not be possible for the UK courts to make a reference to the CJEU after 29 March 2019 and that any reference already made that has not been ruled upon by the CJEU by that date will be aborted.

On 31 March the EU published its draft negotiating guidelines for Brexit. The guidelines indicated that the EU wants to try to negotiate a different arrangement to that proposed in the government's white paper.

The guidelines said that "arrangements ensuring legal certainty and equal treatment should be found for all court procedures pending before the Court of Justice of the European Union upon the date of withdrawal that involve the United Kingdom or natural or legal persons in the United Kingdom. The Court of Justice of the European Union should remain competent to adjudicate in these procedures. Similarly, arrangements should be found for administrative procedures pending before the European Commission and Union agencies upon the date of the withdrawal that involve the United Kingdom or natural or legal persons in the United Kingdom. In addition, arrangements should be foreseen for the possibility of administrative or court proceedings to be initiated post-exit for facts that have occurred before the withdrawal date."

The guidelines said: "The withdrawal agreement should include appropriate dispute settlement mechanisms regarding the application and interpretation of the withdrawal agreement, as well as duly circumscribed institutional arrangements allowing for the adoption of measures necessary to deal with situations not foreseen in the withdrawal agreement. This should be done bearing in mind the Union's interest to effectively protect its autonomy and its legal order, including the role of the Court of Justice of the European Union."

The UT released its decision denying the trustee's application on 26 April 2017.

In denying the trustee's application, Mrs Justice Rose said that although it appears at present that the government intends to bring an end to the jurisdiction in the UK of the CJEU, the detail as to how this will be achieved has not yet been explained. She said that, in particular, we do not know what kind of transitional provisions will be put in place to deal with people who are at the date of the UK’s exit in the course of litigation to determine issues of directly applicable EU law that have arisen during a period before Brexit.

Mrs Justice Rose said that she was not prepared to assume that "the arrangements that the government will make for resolving disputes about the interpretation and application of EU law that are pending at the date of UK’s exit will be so unsatisfactory that the Tribunal should change its usual practice and  accelerate the making of references".

"Some solution to the problem that arises in this case will have to be implemented because there are likely to be very many people in the same position as the trustee may be on the date of exit. Whatever those arrangements are will apply to the trustee and will be implemented by the courts in accordance with whatever the law dictates. It would not be right to pre-empt that by rushing a preliminary reference off to the CJEU in the hope that the Court will give a ruling before the UK exit" she said. The UK government white paper and the EU draft negotiating guidelines noted above, both published subsequent to the 10 March hearing but before release of the UT's final decision on the trustees application, were not expressly referred to.

The judge rejected the trustee's submission that a purposive approach to the interpretation of Article 267, as a result of the triggering of Article 50, now meant that the UT was a final court which was obliged to refer the case to the CJEU. She also decided that the triggering of Article 50 did not alter the test which the UT has applied to date when deciding whether, as a matter of discretion it should make a reference.

The judge gave a number of reasons for declining to exercise the UT's discretion to make a reference to the CJEU at a preliminary stage. She said it was difficult to decide at this stage how many questions would need to be referred and on what issues. The UT would need full details of both parties’ contentions to make these decisions. She said HMRC could be prejudiced by an early reference as they would need to devote time and resources to participate in proceedings which may prove to be unnecessary. Indeed a referral may not be necessary as there is an established body of case law on what constitutes a restriction on the movement of capital and the UK tribunals and courts are very familiar with applying established principles to new sets of circumstances.

The Tribunal also said that the case was not one of general importance or one which is likely to have any application beyond the cases arising in the UK under the manufactured overseas dividends (MOD) regime as MOD withholding tax was abolished from 1 January 2014 and the issue only affects those who are tax exempt.

Pinsent Masons acted for the trustee of the British Coal Staff Superannuation Scheme in this litigation.