With the extreme noise around Brexit at the moment it is easy to forget that UK is, and (likely) will remain, within the legal framework of the EU for some time to come.

This has recently been highlighted by, of all things, a hearing of the First Tier Tax Tribunal (‘FTT’) concerning exit charges, capital gains tax (‘CGT’) and trusts.

By way of very brief background, the UK has an exit charge when trusts cease to be resident, which results in the trust being deemed to have disposed of the assets it held on the date of emigration at market value – effectively triggering a dry tax charge which is payable in the January following the tax year of emigration. This has been amended to be consistent with EU law, and notably the principle of freedom of establishment, however the amendment was only made by Finance Act 2019, and therefore long after the relevant events in this case.

In this case Mr and Mrs Panayi, who were trustees of a series of accumulation and maintenance trusts settled by them for the benefit of their children, and UK resident, relocated from the UK to Cyprus in 2004 (the trusts having been settled in 1992). As part of this they resigned as trustees and appointed Cypriot resident individuals as trustees – leading to the trusts ceasing to be UK resident, and so triggering the s80 exit charge.

The case followed a fairly lengthy course through the courts, being initially heard in the FTT by Barbara Mosedale, who referred it to the Court of Justice of the European Union (‘CJEU’), and then heard the most recent return of the case to the FTT after the parties failed to agree following the decision of the CJEU

It was referred since it raised the obvious question of whether the exit charge should be disapplied as being, prima facie, incompatible with freedom of establishment, one of the four key rights/freedoms that is to be taken as part of the law of England and Wales pursuant to the European Communities Act 1972 (which for the moment remains very much in force).

As an aside, an interesting point is that to engage the right to freedom of establishment it had to be accepted that a trust carries on an economic activity, and HMRC questioned therefore whether the trustees could rely on the EU law at all. HMRC was however persuaded that the trust in question did indeed carry on an economic activity, which, while case specific, is a useful benchmark.

The CJEU found clearly that the exit charge was contrary to the principle of freedom of establishment, but equally that an exit charge of itself would not automatically be contrary to freedom of establishment, if applied proportionately – which in essence meant an ability to defer the charge and/or pay by instalments.

There was no such possibility when the exit charge was triggered under s80.

In the most recent hearing in the FTT the two key questions were whether a conforming interpretation of the relevant legislation was possible and, if not, and UK legislation had to be disapplied, what was the effect on the trustees appeal.

Ignoring for a second certain practical difficulties that arise from this concept, the answer initially appears simple. The UK legislation did not at the time permit deferral of an exit charge. Therefore, one would initially think, it follows the legislation cannot be conformed and so would be disapplied.

Not quite. One of the points indicated by HMRC appeared to be that in practice the exit charge only arose after the key assets of the trusts, in this case shares, had been disposed of and gains realised. There seemed to be a suggestion that therefore the trustees were able to discharge the exit charge and hence it was being applied in a proportionate manner. While technically opaque this was in any event dismissed on the basis that the charge arose for payment in January 2006 rather than January 2007, which would have been the case had the trusts remained UK resident and realised the gains.

However, the FTT endeavoured to and did successfully adopt a conforming interpretation which allowed it to conclude the UK legislation was indeed consistent with the freedom of establishment in this case. It found that although s80 imposes an exit charge, there was nothing in this that was contrary to EU law - Parliament was not concerned with the timing of payment of the exit charge but simply to ensure that such a charge applied. Following this, the FTT construed the Taxes Management Act 1970 so that s59B of that Act, which concerns the timing of the payment of, inter alia, the exit charge, so as to reach a conforming interpretation such that where freedom of establishment is infringed s59B will be read as permitting payment of the exit charge arising under s80 in 5 equal instalments without interest.

This leads to the result that the exit charge is applied in a consistent manner.

The rather bigger issue is whether this is not a very extreme conforming approach – the question was whether the exit charge was contrary to freedom of establishment and the CJEU concluded that unless applied in a proportionate manner it was. It seems rather surprising that one then reads an essentially administrative provision, and modifies that provision, to reach the conclusion that there is nothing wrong with the exit charge and that it was be construed so as to confirm with EU law. While it is of course a key requirement of the judiciary that they adopt a sensible construction, and while the approach is to seek to find UK legislation as consistent with EU requirements where possible, this seems very creative. And potentially concerning if such a stretched analysis is read across into avoidance cases which of course do adopt a broad approach to statutory construction – however were this approach to inform future cases it would lead to increasing uncertainty as to the result in apparently legalistic cases.

It remains to be seen if the trustees seek to appeal the decision.