Thursday 16 July 2015

UK Point of Consumption Tax referral: the Heart of Justice?


By Paul Leyland, Founding Partner, Regulus Partners


“Knowledge without Justice ought to be called cunning rather than wisdom.” Plato


The British High Court has ruled that UK Point of Consumption Tax law was sufficiently controversial with regard to EU law that it needed to be referred to the Court of Justice of the European Union (CJEU) for an ultimate decision as to its legality.

According to Olswang, the law firm representing the Gibraltar Betting and Gaming Association (GBGA), there were three key points that the Judge had issue with:

1.       Whether a restriction on the provision of services from Gibraltar to the United Kingdom engages the right to free movement protected by Article 56 TFEU. Mr Justice Charles held that this was an issue of constitutional importance.
2.       Whether the taxes payable under the new tax regime constitute restrictions on the right to the free movement of services for the purposes of Article 56 TFEU. HMRC had argued that in order for a tax measure to be a restriction for the purposes of Article 56 TFEU it is necessary for it to be discriminatory. Mr Justice Charles held that in this regard HMRC had relied on a principle of law which has no clear precedent in European law.
3.       Whether the aims relied on by the UK Government to justify the new tax regime are legitimate. The reasons given by the UK Government for the new tax regime included addressing a perceived competitive advantage for overseas operators and increasing UK tax revenue.

Each of these was cogently argued on behalf of the plaintiff and each clearly makes logical sense.
The CJEU must now find the time to consider then decide whether this part of the 2014 Finance Act is indeed lawful, needs minor tweaks or sends UK government back to the drawing board. In the latter case the proceeds of the current tax will need to be refunded.

This process is likely to take several months for the CJEU to find the time and several more months to consider evidence and deliberate. In the meantime operators must continue to pay the tax.
So far so good for the off-shore remote gambling industry?

I’m not so sure.

Mr Justice Charles, has in my (thoroughly lay) opinion (safely) stuck to points of law and ‘kicked the problem upstairs’ from a constitutional / policy perspective. This is not the same as a judgement that the tax is unlawful and the decision should not be taken as that. Moreover, the track record of the CJEU in gambling and in other fields is that it is quite happy to consider law within the context of wider policy (especially where free trade ‘needs’ to be qualified, with gambling a fairly uncontroversial case in point): indeed as the highest court in the EU it has to.

Looking through the lens of wider policy, is it likely that a vital organ of the EU state is going to find in favour of tax havens and offshore commercial businesses over the tax raising powers of its larger Member States? I think not (certainly not without plenty of get-out clauses in the judgement for which the court is famous). Equally, even if the CJEU does rule in favour of GBGA, is it likely that EU and Member State governments will meekly acquiesce to such a decision and accept the new world order? Of course not… Instead they will be forced back to the drawing board to achieve their ends through different means (possibly with added anti-sector sentiment and belligerence). From a UK-specific perspective, the EU treaty negotiations provide a further mechanism for the EU to ‘help’ UK with a relatively marginal concession in the scheme of things.

So here is the conundrum…

In my view, the best thing the offshore gambling industry can now hope for is that the CJEU finds for HMRC. Otherwise, Member States, including the UK, will have to think up new gambling laws from first principles in order to ensure an ‘adequate’ level of tax and regulatory oversight (according to their own criteria). Opening up that can of worms is not likely to end with the benign, gently regulated and low-tax regime that the UK currently enjoys.

This is a fight the more aggressive elements of the offshore industry may regret ‘winning’…      

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