Does the Internal Market Bill alter the tax devolution settlement?
The Internal Market Bill was introduced to the House of Commons of the UK on 9 September 2020 with the intention of ensuring “free trade in goods and services between the four nations” and “to prevent new barriers to intra-UK trade from emerging”.
A great deal of attention has been paid to the alleged inconsistency of clauses 42, 43 and 45 with the UK’s international legal obligations and in particular the Northern Ireland Protocol to the EU-UK Withdrawal Agreement. This blogpost addresses a narrower but still important question, which is whether the Bill alters the devolution of taxation between the UK and the devolved administrations in Scotland, Wales and Northern Ireland.
The internal markets in goods and services
At first sight, this seems extremely unlikely. Paragraph 9 of Schedule 1 provides that:
The United Kingdom market access principles do not apply to (and sections 2(3) and 5(3) do not affect the operation of) any legislation so far as it imposes, or relates to the imposition of, any tax, rate, duty or similar charge.
This seems to preclude any argument that a devolved tax rule or decision might impede the internal market. Those hoping to replicate the success of claimants before the CJEU who have argued that the tax rules of member states have discriminated against them, in contravention of the fundamental freedoms of the EU, are likely to remain disappointed.
This picture changes, but only in detail, when we look at the definition of “market access principles” in clause 1 of the Bill. Clause 1 provides that:
(2) The United Kingdom market access principles are—
(a) the mutual recognition principle for goods (see sections 2 to 4), and
(b) the non-discrimination principle for goods (see sections 5 to 9).
This confirms that the above exclusion of tax only applies to Part I of the Bill dealing with the internal market in goods. Does it follow that a taxpayer might have greater success in arguing that a tax rule or decision discriminates against them and hence impedes the internal market in services, covered in Part II of the Bill? In a word, no. Part 3 of Schedule 2 provides that clause 17, which governs mutual recognition of authorisation requirements for the provision of services, does not apply to:
Any authorisation requirement in connection with taxation
Likewise, Part 2 of Schedule provides that clauses 18 and 19, which govern non-discrimination in relation to regulatory requirements for the provision of services, do not apply to:
Any regulatory requirement in connection with taxation
So, tax also appears to be effectively excluded from the provisions of the Bill dealing with the internal market in services. The important thing to notice, though, is that the exclusions of tax in Schedules 1 and 2 only relate to specific provisions in the Act, and indeed there is no general exclusion of tax from the Bill as a whole.
Distortive or harmful subsidies
This becomes significant when we look at clause 48 of the Bill, which intervenes in the highly charged question of which of the powers being repatriated from the EU should be assigned to the central UK institutions and which powers should instead be assigned to the devolved administrations in Scotland, Wales and Northern Ireland. Clause 48 confirms that the regulation of State Aid, or in other terminology ‘distortive or harmful subsidies’, will be treated as a matter reserved to the UK.
Whether or not the reservation of these matters to the UK is appropriate in general is irrelevant to the present blogpost, though I note that the UK is likely to need some degree of subsidy control in order to comply with its obligations under WTO law. My concern here is to ask whether this clause has the potential to upset either the existing distribution of devolved tax powers or the trajectory of tax devolution. As the following paragraphs explain, my answer to this is “yes”, with the proviso that clause 48 does not itself regulate tax subsidies (or any other type of subsidy) but merely reserves to Westminster the right to do so. In reaching this conclusion I consider, first, whether a tax rule or decision can in principle be seen as a distortive or harmful subsidy; second, what the Bill says on the matter; third, whether tax is excluded from the operation of clause 48; and fourth, whether there is any special protection for existing arrangements.
On the first question, aside from the provisions of the Bill, we are likely to conclude that a tax relief provided in a discriminatory or otherwise improper manner can certainly be described as a distortive or harmful subsidy. We have all heard of “pork barrel” politics whereby governments provide questionable tax benefits because of family connections or in return for promises to vote for a given political party. Under EU law, too, it is beyond doubt that tax treatments can be held to constitute illegal state aid, even if the recent litigation around the Republic of Ireland’s treatment of Apple has highlighted the uncertainties in difficult cases.
On the second question, the scope of the reservation in clause 48 is expressed as follows:
Regulation of the provision of subsidies which are or may be distortive or harmful by a public authority to persons supplying goods or services in the course of a business.
The definition of “subsidy” further down in clause 48 does not either include or exclude tax explicitly, but paragraph 168 of the government’s earlier White Paper on the internal market suggests that it was intended to be included:
A subsidy is, broadly speaking, support in any form (financial or in kind) from any level of government – central, regional or local – which gives an advantage to a business that it could not obtain otherwise. This advantage could be in any form, including a grant, a tax break, a loan or guarantee on favourable terms or use of facilities below market price.
There is a strong prima facie argument, therefore, that a “tax break” can in principle count as a distortive or harmful subsidy and that the power to regulate such subsidies will fall to the UK under the reservation in clause 48 even in relation to fully and partly devolved taxes.
The third question is whether the Bill excludes tax from the operation of clause 48. The answer to this is that there is no evidence of such an exclusion. As explained above, the exclusions in Schedules 1 and 2 only apply to specified clauses of the Bill and clause 48 is not amongst them.
The fourth question, and perhaps the most worrying of all to devolved administrations, is whether the UK could make use of the reserved powers under clause 48 not only to influence the future trajectory of tax devolution, but to argue that existing “tax breaks” provided by the devolved administrations are distortive or harmful subsides that are now within the competence of the UK to remove. There are a number of “grandfathering” provisions preserving existing arrangements even when they would otherwise contravene the Bill, but there are no such provisions in relation to clause 48 (though perhaps understandably given that the Bill leaves detailed regulation of subsidies to a future occasion). Equally, there is no guarantee of a de minimis level of subsidy that will automatically be left alone, which raises the possibility that subsidies that were too small to attract the attention of EU state aid law may be vulnerable to attack under the powers reserved to the UK by clause 48.
It must be emphasised that we know very little about the likely scope, approach and even existence of the subsidy regime that the UK may implement under the powers reserved by clause 48. There may also an opportunity for the devolved administrations to give or withhold legislative consent once such a regime is proposed and is impact on tax devolution becomes clearer. Hence, my claim here is not that clause 48 represents a direct or immediate attack on the tax competences of the devolved administrations. It is instead that the clause provides a wide gateway for the UK to argue in the future that “tax breaks” provided by the devolved administrations represent harmful subsidies and that they can be removed by the UK notwithstanding that they otherwise fall within devolved competence.
The consequences for devolution
As an EU member state, the UK and its constituent parts have long been subject to EU state aid law and are likely to remain subject to WTO rules on subsidies. Indeed, the Scottish administration has for several years been involved in negotiations on the EU state aid status of a favourable tax regime for air travel in the Highlands and Islands. The application of subsidy control to tax measures is not novel. It is also understandable that the UK might wish to exert such control after the Brexit transaction period, not least to guarantee compliance with its obligations under WTO law and under the terms of any relevant trade agreements. From this perspective there is a clear rationale for the reservation of subsidy control in clause 48 as well as the apparent inclusion of taxation.
This said, devolved administrations could be forgiven for a degree of alarm at the blanket nature of the reservation in clause 48; the lack of detail on the extent or scope of the UK’s post-Brexit subsidy control regime; the uncertainty about the interaction of this regime with tax devolution; and the lack of clarity on grandfathering and de minimis arrangements. To the question “can we now provide a tax break without being vulnerable to this new reserved power” my answer is “who knows?”. This seems rather an unfortunate side-effect of a Bill that is not primarily about tax, and the devolved administrations would do well to seek urgent clarification.
Many thanks to the colleagues who have reviewed this post and provided helpful suggestions. Any remaining inaccuracies are mine alone.
 https://publiclawforeveryone.com/2020/09/09/the-internal-market-bill-a-perfect-constitutional-storm/; https://ukconstitutionallaw.org/2020/09/09/kenneth-armstrong-can-the-uk-breach-the-withdrawal-agreement-and-get-away-with-it-the-united-kingdom-internal-market-bill/; cf. https://www.spectator.co.uk/article/whatever-its-political-wisdom-introducing-the-internal-markets-bill-is-not-unconstitutional.
 Emphasis added.
 See generally Christiana HJI Panayi, European Union Corporate Tax Law (Cambridge, CUP, 2013) Ch 4.
 Emphasis added.
 These differ between Scotland, Wales and Northern Ireland but include full devolution of some property and environmental taxes and limited income tax powers: see in more detail Dominic de Cogan, Tax Law, State-building and the Constitution (Oxford, Hart, 2020) Ch 2.
Dominic de Cogan is a Senior Lecturer in Tax Law at the Faculty of Law, University of Cambridge, and a Fellow of Christ’s College, Cambridge. He is one of the Directors of the Tax Research Network and he is a member of the Tax Law Review Committee of the IFS. In addition to Tax, Dominic teaches on the Administrative Law, Equity and Law of Succession courses, and he has recently published the book Tax Law, State-Building and the Constitution with Hart Publishing.