The City must be on guard for the EU’s legal angels

FROM its inception, the EU has not been a simple, straightforward entity with clear rules and methods of working. Each EU treaty is an amendment of the previous one – and incorporates any number of opt-outs, derogations and allowances, not just for “national specificities” but also to allow latitude of interpretation for the EU institutions themselves. That latitude now places the UK financial services industry at risk.

The entity able to navigate this legal maze is the European Commission – self-professed Guardian of the Treaty – and its “623 angels”, otherwise known as lawyers, who are constantly working to bend those rules to its will.

At the moment, what it wills is a tax that it claims could raise €57bn. The tax is based on financial transactions, 60 per cent of which take place in the UK. The only thing standing in its way is the treaty-enshrined requirement that tax matters require the unanimous support of all 27 EU member states. You might think that the Commission would be looking to guard the treaty’s unequivocal respect for member states’ sovereignty over taxation – yet when €57bn is at stake it has a strong incentive, and the legal resources, to look for innovative ways to get around this problem.

Faced with vociferous questions on member states’ rights, the taxation commissioner stated that he would not be held hostage by one member state – he intimated that there were ways of getting around the unanimity rule, for example by amending existing taxation rules that have already been harmonised.

This sent UK lawyers into a tailspin, looking into what he could mean. One possible avenue is VAT. While financial services are now exempt from VAT in the harmonising directive, there is a view that this exemption could be removed by a qualified majority of member states rather than, as most assume, only by unanimous agreement.

The latest green paper from the Commission concerning VAT states quite clearly just what legal acrobatics they would like to perform to undermine member states’ rights; via one of the Lisbon Treaty’s “streamlining” procedures that were supposed to ease working conditions for an enlarged EU membership of 27.

The Commission has long been pushing for more power over “implementing measures”, which only need a qualified majority of member states to agree to them. Their use is now common in single market legislation. So far, member states have resisted their use on taxation issues. Now that certain large member states have put a lot of political capital behind an EU financial transactions tax, one wonders how long their stand will continue, if they see a quick way of getting what they want without the UK standing in their way.

For now, I can only hope that the UK’s guardians of our sovereignty are also looking into this to ensure that the VAT exemption for financial services cannot be removed via an implementing act, and that this loophole for taking yet more of our sovereignty away is not allowed to become large enough for the Commission’s 623 angels to get through.

Kay Swinburne is the Conservative representative for Wales in Europe