At the end of 2023, certain EU laws and rights retained as part of domestic law in the UK following its departure from the EU will fall away if the Retained EU Law (Revocation and Reform) Bill currently before the UK Parliament is enacted, save where they are effectively preserved by one of the methods prescribed by the Bill or by further legislation. This approach of automatically ‘sunsetting’ parts of retained EU law begins to reverse the trend taken by the European Union (Withdrawal) Act (EUWA) 2018 of preserving the status quo on exit unless and until a particular provision is changed or repealed (in the tax context, the rules for the surrender of EEA company losses, which remained in effect until repealed by FA 2022, come to mind).
But what do these sunset provisions mean for tax? The press release accompanying the publication of the Retained EU Law (Revocation and Reform) Bill stated that ‘all required legislation relating to tax and retained EU law will be made via the Finance Bill (or subordinate tax legislation)’ and that the ‘government will also introduce a bespoke legislative approach for retained EU law concerning VAT, excise, and customs duty in a future Finance Bill’. It is, however, worth considering the relevance of the sunset clauses in the Bill to tax generally, as things currently stand.
According to the government dashboard, HMRC has identified 228 pieces of tax-related retained law:
Let’s look at each of these categories.
EU-derived domestic legislation
The sunset provision applicable to EU-derived domestic legislation is in clause 1 of the Bill, but not all 205 pieces identified by HMRC would be vulnerable under it. For starters, the sunset provision applies only to subordinate legislation; so primary legislation would be unaffected. This is good news because, according to the government dashboard, EU-derived legislation includes things such as the patent box, research and development tax reliefs and the exempt dividend demerger conditions in CTA 2010 s 1081.
The sunset provision applies only to ‘EU-derived’ subordinate legislation, meaning legislation made under the European Communities Act (ECA) 1972 s 2(2) or Sch 2 para 1A (which itself piggy-backs off s 2(2)), or made, or operated for, a purpose mentioned in s 2(2)(a) of that Act. This is a sub-set of the ‘EU-derived domestic legislation’ preserved under the EUWA, which in addition to the foregoing includes any enactment ‘relating otherwise to the EU or the EEA’ – which may explain the surprising breadth of tax measures identified in the government dashboard as being retained by the EUWA 2018.
Given that the ECA 1972 itself provides that subordinate legislation under s 2(2) cannot be used to ‘make any provision imposing or increasing taxation’ (Sch 2 para 1), not much tax-related subordinate legislation cites s 2(2) as an enabling provision. The Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) (Amendment) Regulations, SI 2017/497, are a notable exception. Even though they were notified to the Commission as implementing DAC 4, these do not, however, seem to have been included in the government dashboard of retained EU law – an indication that the dashboard may not necessarily be comprehensive? Be that as it may, the sunset provision would in any event be effectively irrelevant to these particular regulations. This is because they merely amend another piece of secondary legislation (which should not itself be vulnerable under the sunset provision), and any amendments made by a revoked instrument are explicitly preserved under the Bill.
The other gateway into the sunset provision – for subordinate legislation made, or operated for, a purpose mentioned in ECA 1972 s 2(2)(a) – would appear broad enough to catch more tax-related instruments. In order for the statutory provision not to be redundant, it must catch more than merely instruments made under section 2(2). So, it stands to reason that instruments made under a different enabling provision should be caught if they were made for the purpose of implementing the UK’s obligations under the EU treaties.
This would presumably then include things such as the Value Added Tax Regulations, SI 1995/2518 – which probably shouldn’t be revoked if the UK VAT regime is to continue to function. Indeed, the government seems alive to the point (given that it is looking at a ‘bespoke legislative approach for retained EU law concerning VAT, excise, and customs duty’); but what this may mean and how this is going to interact with the Bill is anyone’s guess. It seems unlikely that the necessary legislation would be ready for inclusion in Finance Bill 2023. But any later Finance Bill would probably be passed only after the end of 2023; thus, necessitating that the government exercises its powers under the Bill to either disapply or extend the sunset provision.
EU direct legislation and directly effective rights
The Bill would provide for tax-related EU direct legislation and directly effective rights to fall away at the end of 2023. In respect of the EU direct legislation, the government would have the same options to disapply or postpone the sunset as is available in respect of EU-derived domestic legislation (to the extent it falls within the sunset provision). These options are not available in respect of directly effective rights, although there is the power for such rights to be codified under the ‘restatement’ procedure set out in the draft Bill.
So what does this mean in practice?
An important example of the operation of a directly effective right relates to the stamp duty/SDRT ‘season ticket’ charge. The relevant domestic legislation provides for a 1.5% tax charge on the transfer of securities into a clearance service or depositary receipt system. Pre-Brexit, it was well-established that the application of this charge in respect of capital raisings, i.e. where securities are issued into a clearance service or depositary receipt system, was incompatible with EU law (see HSBC and BNY Mellon discussed in HMRC’s Stamp Taxes on Shares Manual at STSM014020). HMRC has since disapplied the charge in such circumstances, but the legislation was never amended.
So, it was feared that, post-Brexit, capital raisings could again be subject to the charge, but so far this fear has not materialised. The directly effective rights requiring the disapplication of the charge were preserved under EUWA 2018 s 4. Under the Bill, these rights would, however, fall away at the end of 2023. In theory, this would pave the way for HMRC to re-impose the charge. Is this outcome likely? I would have thought not, and perhaps for this we will see legislation in the Finance Bill 2023 to clarify the position.
Tanja Velling, Slaughter and May
At the end of 2023, certain EU laws and rights retained as part of domestic law in the UK following its departure from the EU will fall away if the Retained EU Law (Revocation and Reform) Bill currently before the UK Parliament is enacted, save where they are effectively preserved by one of the methods prescribed by the Bill or by further legislation. This approach of automatically ‘sunsetting’ parts of retained EU law begins to reverse the trend taken by the European Union (Withdrawal) Act (EUWA) 2018 of preserving the status quo on exit unless and until a particular provision is changed or repealed (in the tax context, the rules for the surrender of EEA company losses, which remained in effect until repealed by FA 2022, come to mind).
But what do these sunset provisions mean for tax? The press release accompanying the publication of the Retained EU Law (Revocation and Reform) Bill stated that ‘all required legislation relating to tax and retained EU law will be made via the Finance Bill (or subordinate tax legislation)’ and that the ‘government will also introduce a bespoke legislative approach for retained EU law concerning VAT, excise, and customs duty in a future Finance Bill’. It is, however, worth considering the relevance of the sunset clauses in the Bill to tax generally, as things currently stand.
According to the government dashboard, HMRC has identified 228 pieces of tax-related retained law:
Let’s look at each of these categories.
EU-derived domestic legislation
The sunset provision applicable to EU-derived domestic legislation is in clause 1 of the Bill, but not all 205 pieces identified by HMRC would be vulnerable under it. For starters, the sunset provision applies only to subordinate legislation; so primary legislation would be unaffected. This is good news because, according to the government dashboard, EU-derived legislation includes things such as the patent box, research and development tax reliefs and the exempt dividend demerger conditions in CTA 2010 s 1081.
The sunset provision applies only to ‘EU-derived’ subordinate legislation, meaning legislation made under the European Communities Act (ECA) 1972 s 2(2) or Sch 2 para 1A (which itself piggy-backs off s 2(2)), or made, or operated for, a purpose mentioned in s 2(2)(a) of that Act. This is a sub-set of the ‘EU-derived domestic legislation’ preserved under the EUWA, which in addition to the foregoing includes any enactment ‘relating otherwise to the EU or the EEA’ – which may explain the surprising breadth of tax measures identified in the government dashboard as being retained by the EUWA 2018.
Given that the ECA 1972 itself provides that subordinate legislation under s 2(2) cannot be used to ‘make any provision imposing or increasing taxation’ (Sch 2 para 1), not much tax-related subordinate legislation cites s 2(2) as an enabling provision. The Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) (Amendment) Regulations, SI 2017/497, are a notable exception. Even though they were notified to the Commission as implementing DAC 4, these do not, however, seem to have been included in the government dashboard of retained EU law – an indication that the dashboard may not necessarily be comprehensive? Be that as it may, the sunset provision would in any event be effectively irrelevant to these particular regulations. This is because they merely amend another piece of secondary legislation (which should not itself be vulnerable under the sunset provision), and any amendments made by a revoked instrument are explicitly preserved under the Bill.
The other gateway into the sunset provision – for subordinate legislation made, or operated for, a purpose mentioned in ECA 1972 s 2(2)(a) – would appear broad enough to catch more tax-related instruments. In order for the statutory provision not to be redundant, it must catch more than merely instruments made under section 2(2). So, it stands to reason that instruments made under a different enabling provision should be caught if they were made for the purpose of implementing the UK’s obligations under the EU treaties.
This would presumably then include things such as the Value Added Tax Regulations, SI 1995/2518 – which probably shouldn’t be revoked if the UK VAT regime is to continue to function. Indeed, the government seems alive to the point (given that it is looking at a ‘bespoke legislative approach for retained EU law concerning VAT, excise, and customs duty’); but what this may mean and how this is going to interact with the Bill is anyone’s guess. It seems unlikely that the necessary legislation would be ready for inclusion in Finance Bill 2023. But any later Finance Bill would probably be passed only after the end of 2023; thus, necessitating that the government exercises its powers under the Bill to either disapply or extend the sunset provision.
EU direct legislation and directly effective rights
The Bill would provide for tax-related EU direct legislation and directly effective rights to fall away at the end of 2023. In respect of the EU direct legislation, the government would have the same options to disapply or postpone the sunset as is available in respect of EU-derived domestic legislation (to the extent it falls within the sunset provision). These options are not available in respect of directly effective rights, although there is the power for such rights to be codified under the ‘restatement’ procedure set out in the draft Bill.
So what does this mean in practice?
An important example of the operation of a directly effective right relates to the stamp duty/SDRT ‘season ticket’ charge. The relevant domestic legislation provides for a 1.5% tax charge on the transfer of securities into a clearance service or depositary receipt system. Pre-Brexit, it was well-established that the application of this charge in respect of capital raisings, i.e. where securities are issued into a clearance service or depositary receipt system, was incompatible with EU law (see HSBC and BNY Mellon discussed in HMRC’s Stamp Taxes on Shares Manual at STSM014020). HMRC has since disapplied the charge in such circumstances, but the legislation was never amended.
So, it was feared that, post-Brexit, capital raisings could again be subject to the charge, but so far this fear has not materialised. The directly effective rights requiring the disapplication of the charge were preserved under EUWA 2018 s 4. Under the Bill, these rights would, however, fall away at the end of 2023. In theory, this would pave the way for HMRC to re-impose the charge. Is this outcome likely? I would have thought not, and perhaps for this we will see legislation in the Finance Bill 2023 to clarify the position.
Tanja Velling, Slaughter and May
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