Recent TV documentaries marking the 75th anniversary of VE Day often showed footage of the Nazis’ top secret V2 rocket, which claimed many British lives during the latter stages of World War II. It was a ballistic missile that arrived at terrifying speed so that those one the ground heard nothing before it exploded – laying waste houses, schools and roads, shattering with an abrupt and awful randomness the lives of a civilian population which had survived the horrors of the earlier London Blitz.
Times have changed, but weapons launched from across the Channel still have the potential to wreak havoc on our lives. Paper rockets they may be now, but they are no less lethal, and are designed to do as much damage as possible to the wellbeing of the UK by targeting the jewel in its services crown – the City. The EU has learned from the errors of WWII – the pen is indeed far mightier than the sword and wielded with political skill, can deliver just as much of a knockout punch as the tonnes of high explosive dropped on London by the Nazis.
With the innocuous name C-276/19, the EU’s eco-friendly rocket requires neither jet propulsion nor TNT to do its dismal work. For C-276/19 is the title of the case at the European Court of Justice brought against the United Kingdom by the European Commission to force us to impose VAT on our derivatives markets. As ever with our dealings with the EU, it is always all about the money and how much of it they can squeeze out of us by political activism masquerading as the upholding of EU law and maintaining “a level playing field” in the Single Market. But to get real: they have a gaping hole in their multi-annual budget because of Brexit – it is quite logical to take the Brits to court and make us cough up, and indeed the Commission’s modus operandi in recent years has been to boost its coffers by smash and grab raids on wealthier member states (otherwise known as infraction proceedings).
We have already been hit by over £1 billion on a customs “underpayment” case of doubtful validity, even though at €3.6 billion per annum (2018) we contribute the second highest amount of customs duties to the EU (significantly more than France, at €2 billion). The situation with VAT paid to the EU is even worse – we pay the highest amount of VAT as own resources into the EU budget out of all member states, at €3.3 billion in 2018. For comparison, the next highest contributor was France at €3.2 billion, with powerhouse Germany getting away with a mere €2 billion due to only having to pay half the amount we do under a special deal – 0.15% of the total VAT base instead of 0.30%. And no-one ever complains about the German rebate…
With numbers like these, and the loss of its second largest net contributor, it is very likely that financial imperatives in Brussels will outweigh any consideration of the huge political collateral damage if the Commission tries to enforce an adverse judgement in this highly politicised case.
Rocket C-276/19 is primed and ready to be dropped on London, at 9.30 a.m. on Thursday 14 May 2020. It will need to be defused deftly and swiftly by the British government, and if necessary, turned with unerring aim against the very institution which sent it so that we can get Brexit done once and for all.
Background to the case – setting the fuse
In March 2018 the European Commission sent a formal letter to the UK government, warning that it was investigating a misapplication of the Terminal Markets Order 1973, which zero-rates derivatives trades for VAT. The UK’s alleged “illegal” extension of zero-rating, according to the Commission, dates back to 1977 (i.e. before some current derivatives markets were even in existence). The timing of this notice of infringement, for a supposed infraction dating back four decades (i.e. giving the Commission plenty of time to request that the UK amend its legislation), and coming after we had voted to leave the EU, could not be more political. All subsequent stages of the proceedings need to be viewed as political moves on the Brexit negotiations chessboard.
The original notice ordering the UK to impose VAT on the derivatives markets was designed to put pressure on the May government to surrender ground on the draft Withdrawal Agreement, and came after another failure to muster enough support for an EU Financial Transactions Tax [FTT]. Without the certainty that it could be made to apply to the City it would be a tax of self-harm for the EU27. So picking an old VAT law and trying to reinterpret it as a way of raising money and denting the City’s global dominance was bound to be an attractive idea, since it had far less visibility and so less organised opposition than there had been to the FTT.
The UK disputed the Commission’s claim and left its VAT law unchanged. The Commission followed its initial notice with a “reasoned opinion” – or final warning – in July 2018 (i.e. around the time of the infamous Chequers summit when May and Hammond threw all our negotiating tools out of the box, forcing Brexiteers to resign from the Cabinet in protest). UK VAT law still remained unchanged.
And so, in the torrid days of multiple lost votes on the draft Withdrawal Agreement and with Remainers overturning every democratic and parliamentary principle in the book, the Commission decided to make sure it could still claim its pound of flesh should the WA by some miracle be passed, by referring the UK to the ECJ, in January 2019.
Article 50 extension hands a trump card to Brussels
Had the UK left the EU without a Withdrawal Agreement, as it should have done, on 29 March 2019, the matter would have ended there. But pusillanimous Remainers ensured that we remained locked in servitude to the EU to the tune of £1 billion per month. Brussels, however, was taking no chances, and so formally began proceedings in the European Court of Justice on 1 April 2019, just two days into the first extension to Article 50. One notes the date and rages against the Remainers whose blind adherence to “the Project” let us be played for fools.
The merits of the EU’s case are slim indeed, but the judgment will be political. Had we shown a willingness to sign up to Michel Barnier’s repackaged vassalage (sorry, partnership) agreement on our future relationship with the EU, the ECJ’s judges might be less inclined to beat us over the head with a gavel. But since trade talks appear to be in the doldrums, and with arguments breaking out every which way over interpretations of the Northern Ireland Protocol, a ruling against the UK seems almost inevitable. We are not operating under Common Law norms here. It is not for the EU to interpret its own law consistently and in a timely manner. It is the EU’s prerogative to change the interpretation of its law at any time to suit a breach it wishes to prove. Continued and relentless political activism at the ECJ, in which the EU can be plaintiff, prosecutor and judge, is custom-built for the job.
Consequences of an adverse judgment
If the ECJ rules that the UK did breach the Terminal Markets Order 1973, the layperson might conclude that under the Withdrawal Agreement, the British government is obliged to change its domestic law forthwith to impose VAT on its derivatives markets. This is most unlikely to happen, not least because once the transition period ends on 31 December, we are free to set our own VAT law and zero-rate anything we choose. And changing the law in the time available is simply not feasible with all the other EU Exit legislation still to be made.
But by not imposing VAT on derivatives between now and the end of the transition period, we would be in breach of the ECJ ruling and also in breach of our undertakings under the Withdrawal Agreement to apply such rulings within the UK, and it is here that there is the greatest risk of C-276/19 blowing up the whole Brexit settlement.
The likely short-term outcome would be a refusal by the British government to change its VAT law (since there is no right of appeal at the ECJ), with the Commission lining up further proceedings for failure to implement the judgment.
The effect on the City would therefore probably be neutral. Imposing VAT on the City’s terminal markets would see them offshored to other global jurisdictions in a nanosecond. It would be inconceivable for a government committed to restoring our sovereignty and expanding our trade globally to collude in such a blatant attack on the City’s dominance in financial services, and so one would not expect the situation to change. Despite the EU claim that the Terminal Markets Order has been misapplied since 1977, there is no retrospective aspect to this case and no market actors can be forced to collect back VAT – the Commission simply wants VAT applied now.
In terms of trade talks, an adverse judgment would probably mean the City could kiss goodbye to any sort of enhanced equivalence (which Brussels is not willing to grant anyway) and even basic equivalence for financial services could be an issue. But for every blow the EU tries to strike here, the UK is in a position to retaliate much harder against EU financial institutions, so the outcome is again likely to be neutral. Does anyone even expect there to be a financial service agreement with the EU anymore? The EU’s action against the Swiss in this area to try to bring them to heel has badly backfired, and would do so if they applied the same tactics on the UK.
This brings us to the possible financial and political consequences, and here it gets more interesting.
Potentially, an adverse judgment would have the hardest financial impact on the British government (just as it would be designed to do). I say potentially since, with the current unhappy state of FTA talks and the end of the transition period fast approaching, there is no way the EU can be sure that we would obey its diktats and pay whatever fine it chooses to impose, despite what the Withdrawal Treaty says. Since the infraction is alleged to have taken place over a period of 47 years, one would expect any fine issued to be well north of the €15 billion it ordered in the case against Ireland for illegal state aid to Apple. But it will not be an American digital behemoth which will be expected to pay, but the already much put-upon British taxpayer. One cannot see a Johnson government selling that lemon to a population already hard pressed by the Covid-19 lockdown.
So much for the fine. However, C-276/19 carries a nasty sting in its tail. The EU is struggling to find the funds to prop up EU27 economies hit by the coronavirus and has ruled out “coronabonds”. A Financial Transactions Tax, a Common Corporation Tax and a Digital Services Tax have already been mooted. But getting a slice of a humongous putative VAT take from the UK, and bopping BoJo in the eye at the same time, would be almost irresistible. One would expect the Commission to play hardball because they are in a filthy mood over our refusal to surrender our Fisheries in the trade negotiations. It would therefore seem very probable that an adverse judgment on Thursday would see the immediate launch by the Commission of a claim for underpaid UK contributions to the EU budget, money it will claim should have been owed had we charged VAT on our derivatives markets. The UK VAT base, already the largest in terms of own resources contributions, would increase to an enormous level. So a bill for a few gazillion pounds would be likely to be in the post prontissimo. How far would they backdate the demand – to March 2018, when they notified us of the infringement, or for forty-seven years? It is immaterial – the London derivatives market is so huge that even a claim for the period from March 2018 to 31 December 2020 would be eye-watering.
Of course, that doesn’t mean we would pay it. Nor should we. And here we get to the most political part of this very political case.
Could C-276/19 blow the Withdrawal Treaty sky high?
One thing EU officials still seem to have difficulty understanding is that the UK is no longer a member state, but an independent sovereign nation. This is clearly evident from statements made during trade talks and even more so as regards the Northern Ireland Protocol. Legally, we have left the EU. We can make our own laws, set our own taxes, negotiate our own trade agreements, control our own waters and form our own alliances. We are not asking for any favours from the EU – no complex bespoke “relationship” but a quick off-the-peg model just a short way up from WTO rules. They don’t like it, and with reason, because this independence means our room for political manoeuvre is large. The Withdrawal Treaty is an international agreement, and international agreements – as President Trump likes to demonstrate – can be torn up by a sovereign state.
If the C-276/19 judgment goes against us, and the consequences unfold as set out above (yes, it’s hypothetical, but the European Commission has a depressing habit of carrying out one’s worst case scenario projections), the British government can leave the transition period at the end of this year, ignore all and any summons it receives to the ECJ and demands for money and let the EU seek remedies under the Vienna Convention on the Law of Treaties at the International Court, under international law. Even were a judgment there to go against us, forcing us to pay any unreasonable demands for money would be another battle entirely. The cost of giving in, when we have to reboot our own economy from the coronavirus pandemic, would be too great, both economically and politically.
Therefore, the EU’s smart C-276/19 paper rocket, if correctly handled by the government, could be the secret weapon which blows the whole disastrous Withdrawal Agreement sky high.