Looking at the CJEU decision in Luxembourg v B in the context of the UK's proposed new Financial Institution Notice (which would allow HMRC to request information from financial institutions without prior tribunal approval – and without the right to appeal such a notice after it has been issued) provides an illustration how Brexit may result in reducing the number of potential arguments to question limitations placed on ways in which HMRC decisions can be challenged.
Luxembourg v B
Luxembourg v B concerned a challenge to information notices issued by the Luxembourg tax authorities. The Spanish tax authorities had requested that the Luxembourg tax authorities provide certain information in respect of an individual resident in Spain (FC) under the Directive on Administrative Cooperation (DAC). The Luxembourg tax authorities issued information notices requiring company B and bank A to provide information relating to FC and companies controlled by FC.
Under Luxembourg law, there was no right to appeal the information notices. They could have been challenged only indirectly as part of proceedings appealing penalties for failure to comply. The question before the CJEU was whether this was compatible with Article 47 of the Charter of Fundamental Rights of the European Union requiring that “[e]veryone whose rights and freedoms guaranteed by the law of the Union are violated has the right to an effective remedy before a tribunal”.
The CJEU decided that the person to whom the information notice was addressed (and who would suffer any penalties for non-compliance), but (perhaps counter intuitively to some) not the taxpayer or third parties to whom the requested information related, must have a right to appeal.
- Article 51 of the Charter provides that it applies only when public institutions are “implementing Union law”. This requirement was fulfilled here, given that the information notices had been issued in the context of a request for the exchange of information under the DAC.
- The right to protection against arbitrary or disproportionate intervention by the State in a person’s private affairs is recognised as a general principle of EU lawn and constitutes a “right guaranteed by the law of the Union” for the purposes of Article 47 of the Charter which requires that an effective remedy before a tribunal is available in respect of any violation of that right.
- The ability to challenge the information notice indirectly in penalty proceedings is insufficient to constitute an effective remedy.
The CJEU also commented on the standard of review that the Luxembourg court would need to apply on an appeal in respect of the information notice. The national court would need to be satisfied that the information notice, taken together with the request for the exchange for information from the foreign tax authority, does not require the provision of information that is obviously not “foreseeably relevant” to the foreign tax authority’s investigation, which is a lower bar than requiring that the information requested is definitively relevant to the investigation.
Financial Institution Notices in the UK
One of the drivers for the proposed introduction of the Financial Institution Notice (FIN) was to speed up the process by which HMRC can obtain information which a tax authority in another country has requested under applicable exchange of information provisions. Failure to comply with a FIN would lead to a penalty.
The draft legislation published in July 2020 neither includes a requirement to obtain tribunal approval before issuing a FIN nor envisages a right to appeal the issue of such a notice. The consultation response published by HMRC alongside the draft legislation does, however, state that “the taxpayer may make an application to the courts for judicial review of HMRC’s decision to issue a notice”. Given the high bar for judicial review claims, this is likely to be of only limited comfort.
Assuming, for a moment, that HMRC issued a FIN following a request for exchange of information under the DAC (and ignoring Brexit for these purposes), it should, on the basis of Luxembourg v B, be open to the addressee to argue that a right of appeal must be made available.
As in Luxembourg v B, the Charter would apply pursuant to Article 51, given that the FIN was issued in the context of a request for the exchange of information under the DAC, and Article 47 would require, in effect, that the addressee is able to challenge FIN. But the FIN could be challenged by way of judicial review – that the taxpayer can challenge it in this way has been acknowledged by HMRC and the same should be true for the addressee (given that it is the person on whom the FIN imposes obligations and who would be subject to penalties for non-compliance, the addressee should have standing to apply for judicial review). So, the next step would be to persuade the court that judicial review was insufficient to constitute an effective remedy. This may be challenging given the CJEU’s decision does not impose a stringent standard of review for the national courts, albeit there may still be a gap between this and the ‘irrationality’ threshold in judicial review
The important point is that, following the end of the transition period, it would no longer be possible to make this type of argument.
- Requests for the exchange of information would come through treaty processes as the DAC would no longer apply. Such requests (and FINs issued in respect thereof) would fall outside the scope of the Charter as HMRC would not be “implementing Union law” when administering such requests and issuing related FINs.
- The Charter would no longer form part of UK domestic law following the end of the transition period pursuant to section 5(4) of the European Union (Withdrawal) Act 2018.
- The general principle against protection against arbitrary or disproportionate intervention should, as a general principle of EU law, be capable of being taken into account when interpreting retained EU law (which the FIN would not be), but could not give rise to a right of action.
This is therefore another reminder of the need, post Brexit, for taxpayers (or anyone dealing with tax authorities) to consider their rights in each jurisdiction.