REULA 2023 and VAT and excise law

The government has published draft legislation to be included in the next Finance Bill to clarify the application of EU law to VAT and excise duty following the changes to be made by the Retained EU Law (Revocation and Reform) Act 2023 (REULA 2023). In particular, the draft legislation will ensure that the principle of supremacy, EU rights and liabilities and retained general principles of EU law will (despite the provisions of REULA 2023) continue to be relevant for the purposes of interpreting VAT and excise law.

The draft legislation has been published at this stage to seek stakeholder views on the proposed content and technical aspects of the draft legislation.

Background

Retained EU law is the name given by the European Union (Withdrawal) Act 2018 (EUWA 2018) to the body of EU law which was recognised and enforced by UK law at 23:00 GMT on 31 December 2020 when the Brexit transition period came to an end. Retained EU law occupies a distinct and unique position in UK domestic law.  It has its own rules of statutory interpretation. It may only be modified in a prescribed manner. Only certain courts may depart from it.

Broadly speaking, there are four categories of retained EU law created by EUWA 2018:

• EU derived domestic legislation (s.2)
• Direct EU legislation (s.3)
• other rights and obligations arising from s.2(1) of the European Community Act (s.4)
• general principles of EU law and pre-exit EU case law (which are to be taken into account when interpreting retained EU law) (s.6)

In 2022, the UK government introduced a Bill, the Retained EU Law (Revocation and Reform) Bill, to end the status of retained EU law from the end of 2023 and replace it with the concept of "assimilated law". The government pointed out that the concept of retained EU law was never intended to sit on the statute book indefinitely and it intended to end its special status on 31 December 2023. The Bill was to abolish this special status and enable the government to amend more easily, repeal and replace retained EU Law. In essence, retained EU law was to be either removed from or "assimilated" into UK law by 31 December 2023. Subsequently, the government announced that the original sunset clause to remove all retained EU law except that explicitly made part of UK law would no longer form part of the Bill.

REULA 2023 was eventually enacted in June 2023 and ends the supremacy and special status afforded to retained EU law with effect from the end of 2023. It contains provisions to revoke the EU-derived subordinate legislation and retained direct EU legislation listed in Schedule 1, revoke retained EU law rights and obligations, abolish general principles of EU law and convert retained EU law into "assimilated law". The Act also includes provisions to modify, revoke, replace and update assimilated law. The role of retained EU case law, however, remains largely unchanged by REULA 2023.

REULA 2023 and VAT

VAT is, in essence, entirely a creature of EU law and derived from the EU VAT Directives. In addition, many of the general principles of EU law are very beneficial to HMRC as was recognised by the specific retention of the abuse of law principle as part of the Taxation (Cross-Border Trade) Act 2018 (TCTA 2018). As such, the government website originally made it clear that it would introduce a "bespoke legislative approach" for retained EU law concerning VAT in a future Finance Bill.

The government has now published draft legislation for the future interpretation of VAT and excise law, which provides for the modified application of the provisions of REULA 2023 in this context.

In particular, the draft legislation provides that EUWA 208 s.4 (which deals with EU rights and obligations) will continue to have effect for the purposes of interpreting VAT and excise law (other than Article 110 and 111 of the TFEU (which relate to internal taxation within the EU)).

The abolition of the principle of supremacy of EU law will apply to VAT and excise law in a modified way too. Whilst those provisions will prevent the disapplication or quashing of any enactment as a result of EU law, the original provisions in EUWA 2018 providing for the continued supremacy of EU law will still continue to have effect for the purposes of interpreting VAT and excise law. What this means in practice appears to be that, whilst UK provisions may not be disapplied, the courts will still be required (as far as possible) to interpret them in a way that is in line with EU law. Given the very wide approach to compliant interpretation that the courts have adopted in recent years, this would seem to be a very significant exception.

In addition, the draft clause provides that general principles of EU law will continue to be relevant for the purposes of interpreting VAT and excise law "in the same way, and to the same extent, as they were relevant for that purpose before the coming into force of" REULA 2023. This is perhaps not so surprising, especially in a VAT context, where many of the general principles, such as abuse of law, are beneficial to tax authorities. More generally, however, given the fundamental role that the general principles have had on the interpretation of VAT law, it is clearly welcome that their relevance has not been removed at a stroke, leaving something of a void to be filled. As the government's statement on the draft clause recognises, it "ensures the stability of the VAT and excise regimes and provide legal certainty for businesses" and "mitigates the risk of re-litigating settled interpretations of UK law".

It should be noted that the clause does not make any changes to the provisions included in the TCTA 2018. Most notably in a VAT context, this already sought to preserve the operation of the principle of abuse of law by s.42(4) which provides that 'the principle of EU law preventing the abuse of the VAT system (see, for example, the cases of Halifax and Kittel) continues to be relevant, in accordance with that Act, for the purposes of the law relating to value added tax'.