This blog post is a version of a blog by George Peretz QC on the UK Trade Forum blog . The UK Trade forum is a new initiative by a number of experts in the law and policy of trade to encourage informed public discussion of trade issues in the UK: both George Peretz and Thomas Sebastian are on its steering committee.

Previous post on this blog briefly explained the main features of trade defence instruments (“TDIs”).  In short, they are exceptional customs duties imposed on products that are found to have been “dumped” or subsidised by the exporting country government. This post considers what the UK Government White Paper on the UK’s future trade policy, published on 9 October 2017, has to say on the issues that will need to be decided as to how TDIs will operate in the United Kingdom after Brexit.

Impact on the transitional position

Since TDIs involve the imposition of duties, the United Kingdom will be in no position to take its own independent action on the imposition of TDIs while it is still in a customs union with the EU: any decision by the UK government not to follow an EU TDI would mean that there would be a gap in the common external tariff through which subsidised or dumped goods could pass into the EU, evading the TDI. Any transitional arrangement will therefore, necessarily, involve an automatic pass-through of EU TDIs to the United Kingdom. The United Kingdom will need a mechanism to ensure that UK courts follow the EU courts in interpreting the measure and, conversely, that they do not, if the measure is withdrawn or annulled by the EU courts.

The White Paper does not cover these issues, and instead simply says (at §5.1) that “The new UK trade remedies investigating function will need to be operational by the time we leave the EU. This will enable it to take on new investigations and reviews of existing cases.” Given the points made in the previous paragraph, is hard to square that passage with the Prime Minister’s recognition of the need for a transitional period.

Impact on domestic policy

The fact that other WTO members can impose countervailing measures (“CVMs”) is a serious constraint on the ability of any WTO member to subsidise industries which conduct any significant amount of international trade. Since the devolved administrations have considerable powers to grant subsidies (including, increasingly though devolved tax powers), the need to avoid breach of the United Kingdom’s obligations at WTO level will need to be factored into the post-Brexit devolution settlement. Again, although the White Paper frequently refers to the need to consult the devolved governments on trade matters, it is silent on this particular, important point.

Impact on the deal between the EU and UK

Outside the EU, the default position is that the EU and UK will be able to impose TDIs on each other. As just noted, that in itself would be a constraint on the ability of the United Kingdom (were it to wish to do so) to subsidise domestic producers: the result would be likely to be that those producers would face CVMs from the EU. The United Kingdom might seek a mutual agreement with the EU not to impose TDIs: given that the United Kingdom is the smaller player and hence more likely to be adversely affected by EU TDIs than vice versa, that would seem to be in the United Kingdom’s interests, and would avoid problems in enforcing TDIs at the Irish border. It would also protect the United Kingdom against a protectionist turn by the EU (with an eye on Canada’s concerns about the use of TDIs by the current US Administration).

However, that is not a sustainable position unless the United Kingdom is prepared to agree to State aid control and to commit to an effective competition policy. That is because the whole rationale of TDIs is to deal with distortions caused by state subsidies and protected or monopolistic domestic markets: and if the EU is concerned that the United Kingdom could potentially go down that route, it will refuse to renounce the use of TDIs. Note here that even the EEA Agreement – Article 26 of which contains a mutual renunciation of TDIs as between the EU and the three EEA/EFTA States – nonetheless allows TDIs in relation to fish and other products not covered by the State aid and competition provisions of the EEA Agreement: and, as a result, the EU has in the past imposed anti-dumping duty on, for example, Norwegian salmon exports (in that case after a complaint from the Scottish salmon industry).

The White Paper does not discuss these issues.

Creation of a domestic TDI regime

Outside the EU, the United Kingdom will need to impose its own TDIs: the mechanisms for doing that are briefly discussed in the White Paper. Issues that need to be sorted out include:

• Who should investigate and take decisions? The White Paper say that the Trade Bill will create “a new, independent, trade remedies investigating authority as a new arm’s length body that will investigate trade remedies cases and make recommendations on the basis of clear economic criteria.” This is interesting and ambivalent language, which probably reflects an underlying tension that has not yet been resolved. The tension is this.
  • On the one hand, TDIs involve the imposition of taxes (in the form of duties) and may involve a balancing of competing domestic interests (as well as wider considerations of international trade politics) the Government is likely to want to maintain political control over the imposition of TDIs.
  • On the other hand, the Government is also likely to want an element of independent evaluation so as to assure business, other countries, and the courts that the difficult judgments that have to be made on technical issues are not taken on political grounds, and that procedures are fair and transparent. Moreover, it may well suit Ministers faced with competing domestic political pressures to be able to say that decisions are a matter for an independent decision-maker.
• The White Paper’s language shows that getting that balance right will be tricky. It is keen to highlight the proposal that there will be a new independent body. But it is critical to note that, slipped in at the end of the sentence, is the point that that independent body will merely “make recommendations”. That raises the questions – unanswered in the White Paper – of who is to receive those recommendations and the power of that person to reject those recommendations. One can guess that the decision-maker will in fact be the Trade Secretary: but what will be key is the basis on which he or she is able to reject the independent body’s recommendations, and the procedures that have to be followed before he or she does so. The White Paper says nothing about the former, and as to the latter merely promises transparency and fair procedures throughout.
• What powers should the authorities have to investigate? What presumptions should they be able to apply if faced with non-cooperation by bodies outside the jurisdiction? Should there be any constraint on their powers to demand information from foreign state or state-owned actors, given legal principles of State immunity and wider diplomatic concerns? There is no discussion of these issues in the White Paper.
• Should the wider public interest be considered, or should the UK go down the US route where duty is automatically imposed if the legal conditions are made out? Should the dice be loaded, as in the EU, in favour of imposing duty where the legal conditions are made out? If the public interest is to feature, what factors should be relevant or excluded as irrelevant, and who should make the public interest assessment? Here, the White Paper has a bit more to say. It is makes it clear that there will be an “economic interest” test, which will be applied before any remedies are imposed. That economic interest test will “take into account the interests of domestic producers and regional impacts, as well as those of other interested parties, such as user industries and consumers.” That means that, unlike in the United States, the UK authorities will have power to refuse to impose TDIs even if it is clear that dumping or subsidisation has occurred: the UK authorities will be able to refuse to impose those measures on the basis (for example) that the benefits of the dumping to end users in terms of lower prices outweigh the interests of domestic suppliers. The White Paper does not, however, explain whether the economic interest test will be applied by the independent body or by Ministers.
• The role of the courts. The White Paper promises a right of appeal by “interested parties” to the courts (interestingly, against “decisions made by the investigating authority” rather than by Ministers: the “decisions” language here does not sit well with the earlier statement that the investigating body will merely “make recommendations”). But should there be a statutory appeal to a specialist tribunal (perhaps the Competition Appeal Tribunal, with its expertise in economics), or should the only remedy be judicial review in the Administrative Court? To what extent should the courts be entitled to look at the merits (factual issues and issues of economic judgment) rather than just the legality/rationality of a decision? Who is an “interested party” able to challenge the imposition of duty – purchasers, importers of the goods, consumer groups, or just the exporters? What remedies should the courts be entitled to grant if the duty is quashed (repayment of duty to the importer who actually pays it? compensation to the exporter or purchasers?). Should the courts have power to suspend the imposition of duty on an interim basis? Given that those who apply for TDIs to be imposed will be able to challenge a decision not to impose TDIs on usual judicial review grounds, should they be granted a right of appeal against such a decision, and if so who should have that right and on what grounds?
• What should the relationship be between TDIs imposed by the EU on third countries and UK TDIs? In reality, in cases where the EU has imposed anti-dumping duties or CVMs on, for example, exports of Chinese steel, the United Kingdom might well just want to follow the EU (especially as, if it did not, that could raise issues at the Irish border). There are also evident advantages in extensive co-operation where the EU and UK interests are very similar. If co-operation with the EU is to be “built in” to the UK regime, to what extent should the UK authorities be able to rely on work done by the EU? What co-operation mechanisms, such as exchange of documents and information, are needed with the EU and will the EU agree to them? What should be done where the impact of the dumping or subsidy is plausibly different in the United Kingdom as compared to the EU? What should happen if the EU TDI decision is annulled by the EU courts, or the UK decision quashed or suspended by the UK courts? Should the UK courts be bound by the EU courts’ interpretation of the law, and if not how are any differences to be resolved? What weight, if any, should be attached to findings of fact by the EU authorities or the EU courts? The White Paper is silent on all of those issues: its only discussion of EU decisions is about reviewing which EU TDIs in force on Brexit should continue to be applied.

Conclusion

The United Kingdom will need to establish a robust mechanism for implementing TDIs post-Brexit. The challenges of setting up such a mechanism should not though be under-estimated, and though the White Paper makes some progress in this respect, it remains silent on a large number of key questions. Moreover, the future relationship between the United Kingdom and the EU in the field of TDIs – which has not received the attention it deserves and about which the White Paper maintains a complete silence – remains very obscure and raises a large number of difficult issues.

This blog post is a version of a blog by George Peretz QC on the UK Trade Forum blog . The UK Trade forum is a new initiative by a number of experts in the law and policy of trade to encourage informed public discussion of trade issues in the UK: both George Peretz and Thomas Sebastian are on its steering committee

In the real world of international trade, governments get involved in supporting their own domestic industries. Trade defence instruments (“TDIs”) are mechanisms, allowed by WTO rules, that WTO members can deploy to defend their own industries against “unfair” foreign competition. There are two types of TDIs: “countervailing measures”, which are additional duties designed to deal with goods that have been subsidised by exporting country governments, and “anti-dumping duties” to deal with dumping.

These measures can be very significant. The recent proposed action by the United States concerning alleged Canadian subsidies for the aircraft manufacturer Bombardier attracted a lot of press coverage, and if confirmed will have major implications for Bombardier’s business, including its plant in Northern Ireland. On this side of the Atlantic, the EU had 98 TDIs in place in 2015: and duties imposed by those measures can be very high (the EU has recently imposed duties at rates over 64%). The US has gone far above this level and imposed an anti-dumping duty of 265.79 % on a certain type of steel. The UK Government, in its White Paper on the UK’s future trade policy, published on 9 October 2017, made it clear that the United Kingdom will, after Brexit, have systems in place to impose TDIs: a further post will consider what the White Paper has to say on that.

Anti-dumping duties

At WTO level, the Anti-Dumping Agreement (WTO Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994) regulates the concept of dumping and the steps WTO members are permitted to take to deal with it. In the EU, Regulation 1036/2016 sets out the legal framework.

The concept of “dumping” comes from the US, where anti-dumping legislation dates from the early part of the 20th century. A product is said to have been “dumped” if its “export price” to the importing country is less than its “normal value”.

For those who know some competition law, it bears some relationship to the concept of predatory pricing (pricing by a company in a dominant position at below cost, with the aim of excluding a competitor from the market). But it does not involve any claim that the perpetrator is “dominant” or has market power. Rather, the intuition is that exporting states may offer their industries guaranteed domestic markets, insulated from competition by high tariff or non-tariff barriers. Those industries could, the argument goes, use those profits to fund loss-making exports (i.e. a “cross-subsidy”): and if they do so those loss-making exports will damage the domestic industry of the importing country, which will be unable to compete with those artificially low prices. The extent to which dumping is in fact a significant economic issue is highly debatable: but all significant WTO members make use of the concept.

Countries impose duties on dumping, in order to remove the “dumping margin”. This is calculated by comparing the difference between the “export price” of a good and its “normal value”. The really difficult issue is how to determine the “normal value”. One might assume that the domestic price in the exporting country was the “normal value” – and that is, indeed, the case if there are normal market conditions in that country. But there may be few such sales, or domestic sales may be between associated companies or distorted in various other ways. One possibility in such circumstances may be to look at prices in other countries to which the exports at issue are made: but, again, there may be no clear third country comparator. In that case, a “normal value” has to be constructed by adding together production costs, a reasonable amount for general overheads, and a reasonable profit. Needless to say, there is room for considerable dispute, involving accounting and economic evidence, as to what those costs are. The importing country authorities will often need to seek a considerable volume of data from the exporters, even though (because they are outside their jurisdiction) it can be hard to force those exporters to provide it. In the EU, those difficulties are dealt with to some extent by allowing the authorities to make assumptions if reliable information is not provided.

Even once the “normal value” has been settled, there are issues with comparing it to the actual export price. This is because exporting is generally more expensive than supplying the home market (think of factors such as transport, customs formalities, credit, packing, and assistance with technical standards). These costs have to be taken into account.

Once all of this has been taken into account, a “dumping margin” can be calculated and a duty imposed so as to eliminate that margin.

China and “market economy status”

China poses particular problems in this context. When it acceded to the WTO, members took account of China’s economic system at the time by providing in the accession agreement that, for 15 years after its accession in 2001, importing countries would be allowed to base their calculation of “normal value” not on Chinese prices and costs but on a constructed methodology, unless the Chinese exporters could show that market economy conditions obtained in that sector in China. After 15 years that rule expired – and the expiry of that rule is sometimes referred to as China obtaining “market economy status”. However, in practice the expiry of the 15-year rule has not meant much change so far. That is because the expiry of the 15-year rule simply means that the general rules apply: and those general rules allow departure from a domestic price and costs model in appropriate circumstances. The EU Commission’s response to the end of the 15-year special rule for China has therefore been to announce, in effect, that it will rely more heavily on the general rules: its proposal (agreed last week by the EU Council) is for a “new methodology [in the EU anti-dumping Regulation] that will be country-neutral. It will apply the same way to all WTO members and will take into account significant distortions in certain countries, due to state influence in the economy” stating that “in determining distortions, several criteria will be considered, such as state policies and influence, the widespread presence of state-owned enterprises, discrimination in favour of domestic companies and the independence of the financial sector.”  Whether this proposal is WTO-compliant is in dispute.

Countervailing measures

Countervailing measures (“CVMs”) deal with government subsidies. The EU regime is set out in Regulation 1037/2016. Under the WTO Subsidies and Countervailing Measures Agreement, a subsidy is defined as a financial contribution (or income or price support) that confers a benefit: “financial contribution” here includes not just grants but also loans and equity investment provided on favourable terms, as well as tax credits or provision of discounted goods or services. It does not matter if the contribution is made by central or local government, or even whether it comes directly from the state (a direction by the state to one private company to pay money to an exporter is caught by the rules).

However, a WTO member can impose countervailing measures only if the subsidy is

• “prohibited”: when the subsidy is given in return for export performance (for example, a grant that depends on a certain volume of exports being achieved) or use of domestic over imported goods, or
• “actionable”: when the subsidy is specific to a company, industry, set of industries, or regions.

The effect of these rules is that WTO members cannot impose CVMs in relation to measures such as a generally low rate of corporation tax in the exporting country – but could do so in response, for example, to a low rate of corporation tax confined to a particular region or sector. Finally, CVMs can be imposed only if the subsidy causes injury to the industry of the importing country.

The amount of duty imposed has to be based on the amount of the subsidy. Again, the calculations of the value of the subsidy are beset with difficult accounting and economic issues, as well as the difficulty in obtaining evidence. And assessment of whether the industry of the importing country has suffered injury is also complex, as it involves assessing what would have happened in terms of prices on the affected market if the subsidy had not been granted.

Circumventing TDIs

One obvious response of a company facing TDIs is to ship its goods to a third country, slap the equivalent of a new coat of paint on them, and then export them from that country. To stop that, anti-circumvention measures may be taken. As often the case with anti-avoidance provisions, these can be extremely complicated.

What can a domestic producer do if it thinks it is affected by a subsidy or by dumping?

The decision whether to impose anti-dumping duties or CVMs is for the government concerned. So it is up to the domestic producer to try to persuade its government to take action.

There may well be a number of reasons why a government will not want to impose anti-dumping duties or CVMs even if it has a good legal basis for doing so. After all, purchasers in the importing countries (which may include domestic industry as well as consumers) may well benefit from the low price of the exported goods, even if the goods are “dumped” or those prices are subsidised. So, as is so often the case in trade matters, the decision to impose CVMs or anti-dumping duties typically involves complex trade-offs between clashing domestic interests.

Indeed, the relevant EU rules provide that CMS or anti-dumping duties may not be applied where it is not in the “Union interest” to do so. Thus, Article 21 of Regulation 1036/2016 (Article 31 is the equivalent provision in the Regulation dealing with CVMs) requires that the Union interest must be “based on an appreciation of all the various interests taken as a whole, including the interests of the domestic industry and users and consumers.” However, that Article also requires that “special consideration” be given to the “need to eliminate the trade distorting effects of injurious dumping and to restore effective competition”. It also requires a clear conclusion that the imposition of duty is not in the Union interest before a decision can be taken not to impose duty. That all means that the default position is that if dumping is found, duty will be imposed. Further, it is unclear whether it is legitimate for the EU authorities to take into account wider trade-related or political considerations.

The US goes even further – its complex procedures make no provision for a “public interest” override, so that if a complainant (such as Boeing in the Bombardier case) can show that dumping is occurring, the US authorities have to impose anti-dumping duty.

In both cases, however, cynics may note that the complexity and imprecision of much of the analysis required in a TDI case inevitably gives the authorities in practice considerable “wriggle room” to avoid politically inconvenient findings.

What can an exporter do if it finds itself at the wrong end of a TDI?

There are two main courses of action open to it (which can both be taken at the same time).

One is to seek to challenge the decision in the courts of the state imposing the measures. In the EU, that is done by applying to the General Court of the EU for an order annulling the measure on the basis of error of law (which would include procedural errors) or manifest error of fact. The losing party can then appeal to the Court of Justice of the EU.

The other is to persuade its own government to invoke the WTO’s own dispute resolution mechanisms, but that involves persuading that government to take action, a decision that will always be “political”. Further, the WTO mechanism takes time and offers no right to damages or repayment for the companies affected.

Conclusion

TDIs are a critical element of a modern trade policy. They remain deeply controversial (indeed, many experts in the field are very sceptical of the rationale for anti-dumping rules, as well as critical of the somewhat very rough-and-ready methodologies sometimes employed). But there is a broad consensus, shared by the UK Government, that whatever its role as a “global champion of free trade”, the United Kingdom will need to establish a robust mechanism for implementing them post-Brexit. The issues involved in setting up a UK system of TDIs will be discussed in a separate post on this blog.

On 18 September, Christopher Muttukumaru CB gave a presentation to the FIDE Foundation in Madrid on the enforcement of EU-derived rights in a post Brexit UK context. His co-speaker was Professor Pedro de Miguel Asensio, Professor of EU Law at Complutense University, Madrid.

In summary, Christopher’s presentation covered a number of issues, including the following. The EU acquis as it exists on the effective date of Brexit will become UK national law by virtue of the European Union (Withdrawal) Bill. But the acquis may be amended as it is converted into retained national law; moreover it would be open to the UK Parliament to make further modifications in the future.  The UK considers the CJEU should not have a (direct) post-Brexit enforcement role. Nor, it seems, should the Commission.

Enforcement of rights will therefore become a matter for the national courts and for any regulatory bodies which are given powers in substitution for those of the Commission. The national courts will be bound to give supremacy to rulings of the CJEU in respect of retained EU law provided that those rulings were given before Brexit day. But the UK Supreme Court will alone have power to refuse to follow pre-Brexit rulings of the CJEU. For the future, the UK courts may take account of EU law, but need not do so.

Yet the UK wishes to have full access to the Single Market in the transitional period following Brexit.  There is an obvious risk to the consistency of law making in a post Brexit future unless the UK is able to guarantee that it would follow post-Brexit laws adopted by the EU in the transitional period. There is also an obvious risk to the uniformity of approach by the courts. It seems doubtful that the EUWB, as drafted, will provide adequate assurance to the EU’s negotiators. For example, having regard to the UK Government’s deregulatory aspirations, will the UK continue to adhere to the Single Market rules as they apply to the EU27?

 

The Government today has published its position paper on the “Enforcement and dispute resolution“, in which it sets out its vision for its future partnership with the EU. A copy of the DEXEU paper can be found here.

Since her Lancaster House in January 2017 speech, the Prime Minister has been insistent on her redline that the UK will leave the jurisdiction of the European Court of Justice and that “taking back control” means that individual rights and obligations will be determined ultimately by the Supreme Court alone¹.

Whether that is a realistic proposition will have far reaching consequences, not just for the outcome of the imminent negotiations which are due to resume next week but also for the future UK legal system in terms of providing effective relief and legal certainty for citizens and businesses here and abroad. It is also critical for ensuring equal treatment and a level playing field for cross border business and trade.

Dispute resolution will be a key aspect of the negotiating process since there may be inter-state trade disputes if state measures are perceived to act as a barrier to trade or disputes regarding the correct interpretation of the terms of the Withdrawal Agreement or Future Relationship Agreement. There will need to be some international mechanism for overseeing those arrangements and resolving those disputes efficiently. If that mechanism is not agreed in good time between the UK and the EU, nothing else will be agreed and the UK could be forced to leave without a deal.

Importantly, unlike most international agreements, it is envisaged that the Withdrawal Agreement will provide for ongoing protection of individual rights. Those rights will continue to be protected under the terms of any transitional arrangements, possibly until 2022 or beyond if individual rights are also covered by the Future Relationship Agreement. There may be private disputes, brought by individual citizens or affected companies, challenging the compatibility of state measures with the terms of the new arrangements or enforcing such rights against the UK Government, other EU States or private operators within the EU. Those disputes may, in large part, be resolved within the domestic judicial system in the UK or other EU-27 States.

However, to the extent that the Withdrawal Agreement, Future Relationship Agreement and UK law (courtesy of the Withdrawal Act) “cut and paste” concepts of EU law into the domestic statute book, there will be ongoing disputes about the proper interpretation of those terms. This raises three immediate issues:

The DEXEU paper is not so much a “position” paper but a preliminary discussion paper of the various options available. It poses a series of possible dispute resolution models in briefest outline but does not present their various strengths and weaknesses nor does it commit to any particular solution. However there are four striking concessions, which appear to “colourwash” the Government’s “no CJEU” red line:

In essence, this means that although the Government is intent on leaving the direct jurisdiction of the Court of Justice, there will be considerable scope for it to have an indirect role. The UK will certainly not be leaving the influence of the Court of Justice’s jurisprudence, even in the brave new world under the Future Relationship Agreement.

These developments are to be welcomed as a pragmatic solution to the Brexit conundrum of securing exit whilst ensuring legal certainty and effective judicial protection for UK businesses and individuals. They reflect input provided by the Bar Council in its “Brexit Papers” which emphasised the need for a clear statutory indication of the extent to which national judges should be required to have regard to CJEU case law (and other EU measures) regardless of whether they pre-date or post-date Brexit day. As Lady Hale and Lord Neuberger have stressed, the status of EU decisions cannot be left purely to judicial discretion. It would put individual judges in an untenable position if they are called upon to flesh out the meaning of obscure concepts of EU-derived law (in the very same way as the CJEU has been criticised for entering into policy arena). The workload of justifying every occasion on which they might or might not have regard to EU rulings in individual cases and ensuring consistency would be a heavy judicial burden. The resulting legal uncertainty and inconsistency between individual cases would lead to a proliferation of appeals risking sclerosis of the legal system. Further, it would create disparity in legal protection as UK citizens abroad would be able to commence proceedings before the French courts and have certainty of consistent interpretation and/or the ultimate protection of CJEU preliminary rulings whereas UK or EU citizens in the UK would not. Could the English Courts be criticised for following or ignoring the ruling of the CJEU in a preliminary ruling from France on exactly the same provision in the Future Relationship Agreement? In cross-border sectors or those subject to common regulatory frameworks, such as e-commerce, aviation, telecoms, pharmaceuticals, any resulting divergence and legal uncertainty will lead to an uneven playing field, distorting competition between companies in the UK and those in the wider EEA.

In terms of dispute resolution, the Bar Council Brexit Papers make three main recommendations:

The Brexit Papers have been written by members of the Brexit Working Group set up by the Bar Council to examine the range of complex issues arising from Brexit and to help the Government identify the legal and constitutional priorities.　Led by Hugh Mercer QC, the group has drawn on the combined expertise and experience of the profession across a wide range of practice areas.

Anneli Howard of Monckton Chambers has assisted in the development of the following recent papers:

Brexit Paper 9: CJEU Jurisprudence

Brexit Paper 10: Dispute Resolution and Enforcement Mechanisms post-Brexit

Brexit paper 17: Competition Law.

Thomas Sebastian has assisted with Brexit Paper 21 on WTO law.

Click here to access these and the other 22 Papers which form the third edition and latest edition of the papers released in June 2017.

¹ In Scotland, the Court of Session or High Court of Justiciary.

The European Union (Withdrawal) Bill, published last week, is the most significant piece of constitutional legislation for decades.  What are its implications for VAT practitioners?

The Bill has two central aims.

The first is achieved in short order by clause 1: repeal of the European Communities Act 1972 (“ECA”).  That clause, to adopt the metaphor used in the Miller case [2017] UKSC 5, blocks the conduit by which EU law becomes part of domestic law.

The second, rather complex, aim is to convert EU law applicable in the UK the day before the UK leaves the EU into domestic law so that the substantive law remains, generally, unchanged on exit day.

In order to achieve that aim, the Bill:

• provides that all subordinate legislation made under the ECA will carry on having effect notwithstanding the repeal of the ECA; and
• provides that EU Regulations (which have direct effect without any domestic implementing legislation) continue to have effect as law.

One of the most controversial aspects of the Bill is clause 7, which would give Ministers very extensive powers to make secondary legislation to remedy “deficiencies” in EU law.

In the world of VAT, none of those provisions is of immediate relevance. The domestic legislation providing for VAT is independent of the ECA (the VAT Act 1994 (“VATA”) and subordinate legislation made under that Act and various Finance Acts).  And EU VAT law is contained in the Principal VAT Directive (“PVD”), which is already transposed into UK law by VATA and subordinate legislation made under it.

But, as we all know, the legislative bones of VATA and domestic VAT Regulations are clothed in the flesh of EU principles, including general principles and the principle that that legislation is so far as possible to be construed in accordance with the PVD, and case-law of the Court of Justice of the EU (“ECJ”).  So what is to happen to that flesh on exit day?

The answer is to be found in clauses 4 to 6, as well as Schedule 1.  These are certain to be the subject of considerable litigation over the years following Brexit.

Clause 4(1) preserves all “rights, powers, liabilities, obligations, restrictions, remedies and procedures” that were imported into domestic law by section 2(1) of the ECA.  According to §88 of the Explanatory Notes to the Bill, that clause preserves all directly effective rights created by the EU Treaties.

However, clause 4(2) provides for a qualification to that principle which is very important to VAT: it states that clause 4(1) “does not apply to any rights, powers, liabilities, obligations, restrictions, remedies or procedures so far as they … (b) arise under an EU directive”.  That means that the principle of direct effect of the PVD is abolished as from exit day (a reading supported by §92 of the Explanatory Notes).  From exit day, therefore, it will no longer be possible to base a tax claim on the PVD itself, inviting the court to disapply any inconsistent domestic legislation.

Instead, at best, the court will be invited to construe the domestic provision so as to be consistent with the PVD.  Here, the relevant provision is clause 5.  Clause 5(2) states that “the principle of supremacy of EU law” continues to apply after exit day “so far as relevant to the interpretation, disapplication or quashing of any enactment or rule of law passed or made before exit day”.  According to §§96 and 97 of the Explanatory Notes, the effect of that provision is to retain the rule that any domestic law passed before exit day must continue to be interpreted, as far as possible, in the light of relevant directives.  However, under clause 5(1), the principle of supremacy of EU law will not apply to any legislation made after exit day, which is to be construed entirely in accordance with domestic rules of construction and therefore without reference to the PVD.

What about ECJ case-law and general principles?  There are four important points here.

First, any ECJ case-law handed down after exit day will not bind the UK courts, though they may have regard to such case law (clause 6(2)).   This provision decides, as a number of senior judges requested that Parliament decide, the question of whether UK courts can look at post-Brexit ECJ case-law in order to assist them on the interpretation of domestic law passed before Brexit and in order to implement EU obligations.

Second, under clause 6(1)(b), no UK court will have power after exit day to make a reference to the ECJ (though that restriction will presumably depend on the success of the UK in maintaining the Prime Minister’s famous “red line” on the role of the ECJ).

Third, under clause 6(4), the Supreme Court is to have power to depart from case-law of the ECJ (applying the same approach as it applies in deciding whether to depart from its own case-law).

Finally, Schedule 1 to the Bill provides, in paragraph 3, that (1) “there [will be] no right of action in domestic law on or after exit day based on failure to comply with any of the general principles of EU law” and (2) that “no court or tribunal … may, on or after exit day, disapply or quash any enactment or other rule of law, or … quash any conduct or decide that it was unlawful, because it is incompatible with general principles of EU law.”   Under that provision, therefore, UK courts will not be able to disapply provisions of pre-exit VAT legislation on the basis that they were contrary to general principles of EU law, such as the principles of equal treatment or of fiscal neutrality.  The most that can be done will be to argue that such legislation needs to be interpreted, so far as possible, to be compatible with such general principles.

One effect of the approach taken by the Bill would appear to be that, where a post-Brexit claim is made in relation to a piece of pre-Brexit legislation that continued to have effect after Brexit, it will be possible to claim in relation to the pre-Brexit period that that legislation should be disapplied as contrary to the PVD or general principles of EU law, but that such a claim will not be possible in relation to the period after Brexit.  In effect, therefore, the previously “dis-applied” domestic provision will be “re-applied” on Brexit day.  That is a somewhat odd result.

What is certain is that there will be much work for advisers in helping clients through, and ultimately litigating, the numerous issues that will arise under this Bill.  Whatever its effects elsewhere, in this area Brexit will prove good for business.

The Government has today published the first draft of the most significant piece of UK legislation for 40 years: the European Union (Withdrawal) Bill, formerly known as the Repeal Bill.

This is by no means the end of the story.  One MP has forecast that the Bill will end up looking “like a Christmas tree because of the number of amendments that will be hung on it”.  It won’t all be over by Christmas either – Parliament will still be debating it well into next year.

But starting points are important and the draft Bill is of profound interest to anyone concerned with Brexit.

In extremely broad terms the Bill is in line with what was expected, given the White Paper published in March. However, the details matter hugely given the significance of the legal consequences that will flow from them – and there are a lot of details to consider in a Bill of 66 pages.

The Government’s proposed approach throws up numerous interesting questions that will no doubt form the subject of future blog posts, including in relation to devolution issues, implementation of the UK’s withdrawal agreement and the extent to which people will be able to challenge the validity of EU-derived laws after Brexit. But some of the more general, headline points are as follows.

• Clause 1 states that the European Communities Act 1972 will be repealed on exit day.
• Clause 2 provides that EU-derived domestic legislation, i.e. primary and secondary legislation passed to implement EU law in the UK, should continue to have effect after Brexit.
• Under clause 3 directly effective EU legislation, i.e. regulations and decisions etc., will also continue to form part of domestic law after exit.
• Clause 4 states that rights and liabilities flowing from directly effective EU Treaty provisions will continue to be recognised and enforceable under domestic law even after Brexit.

Clauses 5 and 6, discussed further below, set out how these pieces of ‘retained EU law’ are to be interpreted.

Clause 7 and legal uncertainty

The most controversial provision, however, is likely to be clause 7, which would empower the Government to use secondary legislation to adjust UK laws they consider would not work properly after Brexit.  Clause 7(1) states:

“(1) A Minister of the Crown may by regulations make such provision as the Minister considers appropriate to prevent, remedy or mitigate —

(a) any failure of retained EU law to operate effectively, or

(b) any other deficiency in retained EU law,

arising from the withdrawal of the United Kingdom from the EU”.

The scope of these powers is both incredibly broad and poorly defined.  Clause 7(2) sets out a non-exhaustive list of deficiencies including where legislation refers to European Commission activities relating to the UK or reciprocal cooperation between UK and EU institutions that will no longer take place after Brexit.

But there is going to be massive scope for argument as to whether after Brexit retained EU laws would, without amendment, be deficient or not operate effectively – and upon such arguments will hang the Government’s ability to pass hundreds of pieces of secondary legislation.

To take one example, section 60 of the Competition Act 1998 provides that our domestic competition rules should be interpreted so far as is possible consistently with the approach under EU competition law.  UK courts could continue to apply section 60 after Brexit – there would be no technical difficulty in doing so.  But many may think that after Brexit it will no longer be appropriate for UK law to be tethered to EU law in this way.

Under these circumstances, will the Government have the power under clause 7 of the Bill to amend section 60?  After spending several minutes pouring over the wording of clause 7 you find yourself, in F.E. Smith’s famous phrase, better informed but none the wiser.  Such uncertainties will arise in virtually every area touched by EU law.

If that were not bad enough, there are at least two additional problems.

First, as the Bill will spend several months being debated in Parliament, the final wording of clause 7 – and therefore the scope of the Government’s powers under it – is unlikely to be known until the second half of next year, at the earliest.  By then, Brexit will be only a few months away.

Second, as and when the Government does bring forward regulations under clause 7, it could find itself beset by legal challenges. While most challenges to secondary legislation take place after the provision has come into effect, it is possible to bring applications for judicial review in respect of draft statutory instruments.

While courts could reject such challenges as premature, there may be sound reasons for hearing them: if a piece of Brexit-related legislation is unlawful, it may be better for all concerned to find that out before rather than after Brexit.  If such challenges are not heard, numerous laws covering huge swathes of legal and economic activity could come into effect on exit day only to be immediately challenged in the courts.

Clause 7 and political controversy

As well as being uncertain in scope, clause 7 would confer executive powers on the Government to bring about major legal and institutional changes that would normally be the subject of detailed parliamentary debate and scrutiny.

These are so-called Henry VIII powers: as confirmed by the express statement that when making regulations under clause 7 the Government will be able to do anything that could be done through an Act of Parliament – including repealing or amending existing pieces of primary legislation.

Almost as if to highlight this, clause 7(5) expressly notes that the Government will be able to create new domestic regulatory bodies to take over any functions previously carried out by EU entities or public authorities in other Member States – “including making an instrument of a legislative character”.

In other words, the Government will be able to pass a regulation creating a new domestic body which is itself empowered to create new UK laws. No doubt some Government department has suggested this is necessary in order to prevent the emergence of a regulatory vacuum emerging after Brexit.  But in constitutional terms it is pretty extraordinary.

The Bill suggests that certain types of regulation made under clause 7 – including those which establish a new public authority or create powers to legislate – should be subject to the affirmative resolution procedure (requiring the approval of both Houses of Parliament), with other regulations subject to the negative resolution procedure (under which they become law unless vetoed by one of the Houses). Parliament is unlikely to consider that an adequate level of scrutiny, so concessions will probably be required if the Bill is to pass.

The interpretation of retained EU laws

While clause 7 will be the most politically contentious provision, clauses 5 and 6 are of considerable interest to lawyers – for they set out how retained EU laws will be interpreted after Brexit.

It will not surprise anyone that clause 5(1) provides that the principle of the supremacy of EU law will not apply to any new laws made after the date of Brexit.   But the principle of supremacy will, according to clause 5(2), continue to apply after Brexit – for the purpose of interpreting any enactment or rule of law passed before exit day.  Arch Eurosceptics may be displeased, but that is consistent with the Government’s stated goal of ensuring that, so far as practicable, the law should be the same the day after Brexit as it was the day before.

Arguably inconsistent with that goal, though, is the statement in clause 5(4) that “The Charter of Fundamental Rights is not part of domestic law on or after exit day”.  Leaving to one side whether it would be preferable for the Charter to remain part of our law as a matter of legal policy, the technical difficulty with this is that up until the date of Brexit all EU rules fell to be interpreted in the light of the Charter (given the need for consistency with it).

When you are applying EU-derived rules after Brexit, do you therefore need to ask whether their pre-Brexit meaning was influenced by the Charter, and if it was work out what the rule would have meant absent the Charter?  This is exactly the sort of legal rabbit hole that the Government says it wants to avoid.

Last (for now) but not least, clause 6 provides that retained EU laws that have not been modified by regulations made under clause 7 should be interpreted in line with pre-Brexit judgments of the EU courts. The only general exception is that the UK Supreme Court is not so bound, thereby effectively conferring Supreme Court status on all pre-Brexit EU judgments.

But there is an obvious flaw with this, which I wrote about in March when the White Paper was published.  According to the Government, the rationale for its approach is to ensure that “for as long as EU-derived law remains on the UK statute book, it is essential that there is common understanding of what that law means”.

But what happens when EU law develops from the state it was in at the date of Brexit?  In that situation there is little point in UK courts continuing to be bound by (outdated) pre-Brexit judgments, and the Supreme Court will not have the capacity to hear appeals in every case where that has happened. One possible solution might be to provide that UK courts should not be bound by pre-Brexit judgments where EU law has subsequently developed, although that would raise issues about what constituted a sufficiently material development for that purpose.

The interpretive obligation does not apply, however, where a retained EU law has been modified by a regulation made under clause 7.  One civil servant recently told me that they thought the vast majority of EU derived law would need some form of modification.  That might have the happy consequence of reducing the scope of these interpretative difficulties, but it also emphasises the scale of the task ahead.

Over the last weekend, there has been considerable discussion of Euratom, and of the Government’s position that the United Kingdom will be leaving the Euratom Treaty along with the EU.

There is great concern that exit from Euratom will cause substantial problems for the UK nuclear industry.  Those concerns are set out, for example here. It is also worth reading a useful background briefing from the Nuclear Industry Association (NIA), which makes recommendations as to action that the UK Government should take.

What are the legal issues?

The Euratom Treaty

The Euratom Treaty is a separate Treaty from those of the European Union, reflecting its origins as a separate treaty from that establishing the European Economic Community.  It sets up a system for the regulation of the nuclear industry across the Member States.

The Euratom Treaty simply adopts the institutions set up by the EU Treaties (the Commission, the Councils and the Court of Justice.  It does this, now, in Article 106a(1), which simply states that a long list of provisions of the EU Treaties (including those provisions that set up the institutions and confer powers on them) “shall apply to this Treaty”.

Article 50 TFEU and Euratom

One of the list of provisions “imported” by Article 106a(1) Euratom is Article 50 TEU – the famous withdrawal provision.  Further, in contrast to the EEA Agreement (which has its own separate withdrawal mechanism in Article 127), the Euratom Treaty has no withdrawal mechanism of its own.

That would appear to suggest that, if a Member State gives notice of withdrawal from the EU under Article 50 TEU, that amounts to notice of withdrawal from Euratom.  That consideration is strengthened by the fact that, not only is no provision made for any State to be a member of Euratom but not the EU, but that it is hard to see how the institutional arrangements common to both the EU Treaties and the Euratom Treaty could work in such a scenario. (How would elections to the European Parliament or membership of the Council operate for a Member State that was in Euratom but not the EU?)

An alternative view might be that the effect of importing Article 50 TEU into Euratom is simply that there is a separate, but procedurally identical, process for leaving Euratom (rather than that any invocation of Article 50 TEU necessarily carries over into Euratom).  However, such an interpretation would be difficult to reconcile with the points made in the previous paragraph.

The Government’s public position

The Government first set out its position in the Explanatory Notes to the EU (Notification of Withdrawal) Bill.  Paragraph 18 said that:

The power that is provided by clause 1(1) applies to withdrawal from the EU. This includes the European Atomic Energy Community (‘Euratom’), as the European Union (Amendment) Act 2008 sets out that the term “EU” includes (as the context permits or requires) Euratom (section 3(2)).

That, in itself, was no more than a statement that the Government considered that the wording of the Bill gave it power to withdraw from Euratom (because, in UK statutes, “EU” is taken to include Euratom).  It said nothing about whether, as a matter of EU / Euratom and international law, withdrawal from the EU but not Euratom was an option.

In her Article 50 letter, the Prime Minister said this, immediately after referring to withdrawal under Article 50:

In addition, in accordance with the same Article 50(2) as applied by Article 106a of the [Euratom Treaty], I hereby notify the European Council of the United Kingdom’s intention to withdraw from the European Atomic Energy Community. References in this letter to the European Union should therefore be taken to include a reference to [Euratom].

That drafting is interesting.  Given that the Prime Minister had, in the previous sentence, already notified under Article 50, the words “I hereby notify” in this sentence must refer to a separate act of notification.  But if that is so, then it would seem to follow that the Prime Minister was proceeding on the basis that her Article 50 notification would not, on its own and without these additional words, count as a notification of the withdrawal from the Euratom Treaty, and that she considered that a further notification was needed.

Finally, in evidence to the House of Lords Select Committee on Science and Technology in February 2017, the Energy Minister (Jesse Norman MP) said this:

37. Let me talk about the Euratom side … As the Committee will be aware, as a Government, we have taken an extremely proactive forward-leaning stance as regards Euratom. It will be a regrettable necessity, from our point of view, that notification has to be filed at the same time as Article 50. We remain very engaged with European partners in the EU and among nation states on Euratom. We are actively working up alternative arrangements. (emphasis added)

That language appears to indicate that a separate notification act was required (“filed at the same time as [the] Article 50 [notification].”  But it also suggests that the Government saw that as a “regrettable necessity”.

Analysis of the Government’s position

As I said above, the position under the Treaties seems to be that a Member State withdrawing from the EU has no choice but to withdraw from Euratom.

That, though, raises the question of why the Government has not said so in clear terms.  As we saw above, the Article 50 letter presented the decision to withdraw from Euratom as a separate decision.  And even the phrase “regrettable necessity” is ambiguous: the phrase is entirely consistent with a political, as opposed to a legal, necessity (such as a political “necessity” to avoid any post-Brexit contact with the CJEU).

One possible answer is that the Government did not wish to expose itself to judicial review.  After all, when a decision maker states that she is taking a decision because she has no legal alternative, she exposes herself to judicial review on the basis of error of law: if in law she does have an alternative legally open to her, her decision is likely to be quashed.  And, as will be apparent, the legal position is not entirely clear.

Moreover, the issue is a new question of pure EU/Euratom law on which only the Court of Justice of the EU could give a definitive ruling.  So the argument for any such judicial review application to be referred to the CJEU for a preliminary ruling would have been a strong one.  One suspects that a reference to the CJEU of that issue would not be entirely welcome to the Government.

That position does however leave the Government in a political difficulty.  If it wants to maintain that it could have avoided notifying withdrawal from Euratom, it has to explain why it did do so.  And, as Jesse Norman’s language indicates, it is not finding that easy to explain. That may be why, according to an article in The Guardian yesterday, it was told by an unnamed “senior Whitehall source” that “the government … included that line [in the Article 50 letter] because of a belief that the UK had no choice. [The source] said that ‘both the UK government and the European [C]ommission thought it was a legal necessity’ to leave Euratom as part of Brexit.”

How to keep the UK in Euratom

Assuming that it is not possible under the existing treaties to withdraw from the EU and stay in Euratom, what should the Government do?  After all, if that assumption is right, the Government would achieve nothing by unilaterally revoking its notice of withdrawal from Euratom, as long as the Article 50 notification in relation to the EU remains in place.

EEA membership (even if it were acceptable to the Government for other reasons) does not assist here.  The EEA Agreement does not include Euratom.  Though Norway has various technical agreements with Euratom and participates in some of its programmes, it is not otherwise part of Euratom.  The same applies to Switzerland (not in the EEA but with partial access to the internal market) – although Switzerland has an association agreement with Euratom enabling it to take part in various research programmes.  Neither the Norwegian nor the Swiss arrangements with Euratom will deal with the urgent regulatory issues that have to be resolved if a disastrous gap in regulation in March 2019 is to be avoided. Those difficulties centre on the enormous practical difficulties in getting a domestic regulatory regime that meets strict international standards up and running in time: in particular, as the NIA paper points out at §3.10:

If the UK has not replaced the Euratom safeguards regime with its own system by the time it left Euratom, normal business could be disrupted right across the nuclear industry. It is currently unclear the extent to which transitional arrangements could operate to ensure the UK remains compliant with its obligations under international nuclear law. It is vital therefore that a replacement Voluntary Offer Agreement is agreed with the [International Atomic Energy Authority] and that a new safeguards regime, compliant with IAEA requirements, is in place by the time the UK leaves Euratom.

It seems to me that the best that can be achieved is the negotiation, first, in the withdrawal agreement of continued membership of Euratom for a period (though the UK would lose its vote in decision-making) and, second, a further treaty between the EU and the UK giving the UK some form of associate member status so as not to lose the co-operation and scientific benefits of involvement in Euratom (probably covering far more ground than the Swiss agreement).

It will be apparent that this is one area where “no deal” is simply not an option, for the reasons explained above.  Moreover, any arrangement under Euratom will necessarily mean accepting the jurisdiction of the Euratom institutions – the European Commission and the Court of Justice of the EU.  That is why Euratom is a test case for the Government’s “red line” on the jurisdiction of the CJEU. However, though this is a critical sector, its sudden prominence in the debate is largely due to the historical accident that the nuclear industry is subject to a separate Treaty, thus raising the legal issue discussed in this blog and causing it to have special attention in the Article 50 letter.  In fact, the legal and policy issues – how to reconcile Brexit with remaining closely involved in EU regulatory regimes which there is little or no UK interest in trying to duplicate and with which there is an overwhelming interest in remaining harmonised, while also honouring the “red line” of ECJ jurisdiction – are very similar to those raised by other sectors such as pharmaceuticals (as to which see my recent blog post).