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EU tax law creating £55 billion black hole in UK finances

HMRC has set aside £55 billion to cover the potential cost of payments, including interest, which the European Court of Justice will force upon the British taxpayer.

3rd December 2016
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EU law and direct taxes

The UK, in common with other EU member states, has not conferred any authority on the EU for direct taxes.  The Court of Justice of the European Union (CJEU) assumed this authority in the late 1990s by adopting a more expansive interpretation of the fundamental freedoms.

The staggering cost of EU law tax litigation
One of the consequences of being a member of the EU is that EU law is superior to English law.   Large UK based companies are, therefore, able to use EU law, and EU courts, to retrospectively challenge the legality of the tax laws enacted by Parliament.   This is highly profitable form of activity for large UK companies and their advisors, which is costing the UK Government tens of billions.  When UK companies challenge the legality of the UK’s tax laws under EU law they know they are “knocking at an open door”, because the CJEU is keen to expand its authority over Member States under the guise of “ironing out inefficiencies” in the operation of the single market. 

HMRC has set aside £55bn to cover the potential cost of the litigation in which it is involved.  There are two reasons why this figure is so large.  First in a number of cases involving EU law, UK companies are able to reclaim corporate taxes, dating as far back as 1973.  Second, EU law requires the UK Government to pay compound interest on these claims.  In the Littlewoods case, a claim of £208m, covering the period from 1973 to 2004, cost the Exchequer £1.2bn when compound interest was included.  The UK Government had previously estimated that the Franked Investment Income case (C-362/12) would cost £5-7bn.  However, this case could easily cost the Exchequer £30bn when compound interest is included, as it covers the period from 1973 to 1999.


European Career Politicians as EU judges
Each EU Member State is able to nominate an EU judge.  In 1995, Belgium nominated its Deputy Prime Minister, Melchior Wathelet, to be an EU judge.  Although Wathelet had studied law as a student, he had been a career politician from 1977 to 1995.  This raises questions about both his competence and his impartiality.

Wathelet was subsequently appointed as an Advocate General.  When a case comes before The Court of Justice of the European Union (CJEU) it is usually heard by at least five judges, one of which will be an Advocate General.  The Advocate General is responsible for writing a legal opinion on the case under consideration for the benefit of other judges.  In the majority of instances, the CJEU decides cases on the basis of the Advocate General’s opinion. This is what happened in the Franked investment Income case (C-362/12), a case that will cost the UK Government in the region of £30bn.  Wathelet wrote the legal opinion and the other judges agreed with his opinion. 

What did the UK Government do “wrong“ in the Franked Investment Income (FII) case (C-362/12) so as to breach EU law.
The simple answer to this question is: the UK Government did nothing “wrong”.  The reason the UK was held to have breached EU law is because the UK is a common law jurisdiction, rather than a civil law jurisdiction.  In fact, the UK is the only large common law jurisdiction in the EU, as the other common law jurisdictions are Ireland, Malta, and Cyprus.  All of the other EU member States are civil law jurisdictions.  This means that the EU commission is staffed, for the most part, with people from civil law jurisdictions, and the Court of Justice of the European Union consists mainly of civil law jurists.  This meant that in FII the UK was adjudicated on the basis that it is a civil law jurisdiction, notwithstanding that the facts of the case are unique to a common law jurisdiction.

In a civil law jurisdiction, only the State is able to create a restitutionary remedy against itself.  This means that the State has the opportunity to set an appropriate limitation period at the same time it creates a new remedy.   It is not possible for the UK Government to set an appropriate limitation period at the same time the English courts announce their decision to create a new remedy.  This is because the UK Government and the English courts operate independently of each other.  This means that the UK Government has no prior knowledge of the decisions of the English courts.

The reason the UK Government was held to have breached EU law was because the facts of FII were adjudicated by the CJEU on the basis that they arose in a civil law jurisdiction, notwithstanding that the facts are unique to a common law jurisdiction. The FII case is another example of the “one size fits all” philosophy, which prevails in the EU.


The UK Government and the BBC working together to conceal the truth regarding the EU
One of the Vote Leave claims was that the UK Government would have to repay £43bn in taxation because of EU law.

The BBC’s response to this claim on its Reality Check site was:

‘HMRC say: “There is no question of this amount or anything close to this amount [£43bn] ever being repaid as the figure is based on our losing every single case currently being litigated, which is not going to happen. In reality, HMRC wins most cases at Tribunal.”’

At the time HMRC gave this response to the BBC, it had produced its accounts for the year ending 31st March 2016, although they had not been published.    HMRC knew that the figure of £43bn was an under-estimate of the potential costs, because it had increased the figure in its latest accounts to £55bn.   Moreover, HMRC knew that the increase related to claims for breaches of EU law. 

There are several other comments that one can make about the comment HMRC gave the BBC. 

1.      Why did the BBC ask someone who reported to George Osborne to make a supposedly “impartial comment” on the Vote Leave’s campaign? 

2.      HMRC does not have to lose every single case for it to have to pay-out £43bn.   HMRC has already lost a number of important cases involving EU law that will require the UK Government to repay taxes dating as far back as 1973, together with compound interest.  These cases alone could cost the UK Government £43bn, or possibly more.  HMRC has consistently under-estimated the cost of settling these and other legal cases in which it is involved. 

3.      The courts decide who wins the cases in which HMRC is involved, not HMRC.  

4.      It is of no significance that HMRC wins most cases at Tribunal, because such cases are for trivial amounts.

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