Accelerating a reference to the CJEU in view of Brexit

Wed 21 Jun 2017

The trustees of the British Coal Staff Superannuation Scheme failed their attempt to get the Upper Tribunal (UT) to refer questions to the CJEU in advance of the UT hearing of their appeal against the First tier Tribunal’s (FTT) decision to refuse their claim for repayment of disputed withholding tax.  The Trustees had hoped to get a reference made before the UK left the EU and the jurisdiction of the CJEU.

The request was refused for four reasons:

• It was difficult to decide how many questions should be referred and on what issues.  For example if the UT agreed with the FTT that UK manufactured overseas dividend (MOD) rules in operation at the relevant time did not constitute a restriction on the movement of capital, the issues would fall away;
• The UT did not want to pre-empt their review of whether the FTT had erred in law, which was a matter for the appeal before the UT;
• The UT considered there was little likelihood of the issues having repercussions beyond the facts of this case and those stood behind it.  Withholding tax on MODs was abolished from 1 January 2014;
• The UT considered the FTT had already looked at the EU law issues on restrictions on freedom of movement of capital, and the requirement to preserve a balanced allocation of taxing powers between member states, and to take account of tax avoidance.  The real issue between the parties was whether the operation of the MOD regime was likely to dissuade tax exempt funds from acquiring and lending overseas shares rather than UK company shares. If the FTT were correct in their view, then a reference to the CJEU was unnecessary.

Where a UK owner of shares lent them to a borrower, with the borrower required to compensate the lender for dividends paid during the period of borrowing, the payments from borrower to lender were known as manufactured dividends and MODs in respect of overseas shares. At the relevant times, no withholding tax was levied on manufactured dividends paid in respect of shares in UK companies, but was for MODs paid in respect of overseas shares.  Since the Trustee was exempt from tax on dividends, the withholding tax was an absolute cost.

On the basis this differentiation was contrary to the EU law principle of freedom of movement of capital, the trustees of the British Coal Staff Superannuation Fund submitted a reclaim for £8.8m withholding tax suffered on MODs during the tax years 2002/03-2007/08. The FTT held there was no restriction on the freedom of movement of capital, and even if there had been, it could be justified by reference to fiscal cohesion in the UK tax system.

It will be interesting to see the outcome of the UT appeal. The Government’s 9 May 2017 policy paper on legislating for the UK’s withdrawal from the EU did state that UK Courts would be the ultimate arbiters of UK laws, with UK courts not being required to consider CJEU jurisprudence.  It also stated, however that any question as to the meaning of EU-derived law will be determined in the UK courts by reference to the CJEU’s case law as it exists on the day the UK leaves the EU.

This might provide assurance as to the legal interpretation as it existed before the UK left the EU, but would place no obligation on the UK to follow EU jurisprudence from that date. In considering any future reference under an accelerated timescale, in addition to considering the strength of their case for such a reference, appellants will need to assess the risks arising under the competing jurisdictional legal interpretations.