Brexit Tax: the Withdrawal Agreement Bill

The European Union (Withdrawal Agreement) Bill had its much-heralded second reading today (20 December). The Bill is in substantially the same form as the Bill which passed its second reading in October 2019, but whose progress stalled when Parliament refused to approve the proposed timetable for the remainder of its passage through Parliament.

There are, however, some important changes reflected in the revised Bill. Some of these have been highlighted in the press. They include the removal of the power of Ministers to extend the transition period beyond 31 December 2020; and the removal of the additional procedural protections for workers’ rights that currently form part of EU law following the completion of the transition period. 

The potentially important changes from a tax perspective are the new provisions (in clause 26 of the Bill) amending the provisions of the EU (Withdrawal) Act 2018, which relate to the interpretation of EU retained law by UK courts and tribunals after the end of the transition period. 

The Withdrawal Act incorporates EU law together with the relevant principles of CJEU case law into UK law on the “exit day”. The date of incorporation of EU law into UK law will be deferred by the Withdrawal Agreement Bill so that it takes effect at the end of the transition period. The Withdrawal Act then included provisions concerning the interpretation of this body of retained EU law by courts and tribunals, the effect of which was that historic (i.e. pre-Brexit) decisions of the CJEU would remain binding on UK courts and tribunals except where the Supreme Court overruled a CJEU decision in accordance with its own rules for departing from its own previous decisions. 

The new Withdrawal Agreement Bill will allow regulations to be made which permits courts or tribunals to depart from retained EU case law in circumstances provided for in the regulations. How widely this power will be used remains to be seen. In the tax context, the main area in which this provision is likely to be relevant is VAT, which throws up the prospect of a relatively early divergence of UK and EU VAT principles following Brexit if the regulation-making powers are used in the VAT sphere. (That said, there are specific saving provisions in the Taxation (Cross-Border Trade) Act 2018 which preserve the anti-abuse principles in the Halifax and Kittel cases. So, even if they are potentially within the scope of the new provisions in the Withdrawal Agreement Bill, a divergence from the principles in those cases looks unlikely.)

The principal effect of the Withdrawal Agreement Bill is, of course, to give effect to the Prime Minister’s revised agreement. With “Brexit day” now looking set to for 31 January 2020, in the New Year, we will publish a series of blog posts by way of a reminder of the most significant tax implications of that agreement.