David Cameron

Second Time Around: EU Membership for Scotland is More Difficult, Not Less

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And so here we are again. A second independence referendum now seems more likely a question of when, and not if. Those of us who fed into the debate in 2014 are already preparing to do so again. And while the issues remain remarkably the same, the context has changed entirely.

I did not involve myself in the politics of the 2014 referendum at all. In part because I genuinely didn’t make up my mind until the month before. However, as I also contributed towards the academic debate surrounding independence I did not want to appear too partisan.

In 2014, Dr. Daniel Kenealy and I wrote a paper in the European Law Journal, considering the issues surrounding an independent Scotland’s prospective European Union membership. We argued that, although Scotland’s continued membership of the European Union would not be automatic, it was highly likely that it would continue without interruption.

However, that was then, and this is now. And while the issue of EU membership is likely to feature heavily in the debate on Scottish independence once again, the context has changed considerably.

Timing

Nicola Sturgeon wants to time a referendum such that it will be held towards the end of the UK’s Brexit negotiations, but before the expiration of the two year time limit. This is, purportedly, so that Scotland can have a “genuine” choice between independence with EU membership, or union without.

However, this makes little sense for a number of reasons.  Much has been made of the length of time these negotiations might take. Such negotiations almost always go down to the wire, and Article 50 TEU allows for the possibility of seemingly-indefinite extension.

A cynic might take the view that the real reason behind the proposed timing is to ensure the referendum takes place before people acclimatise to Brexit and realise that the sky hasn’t actually fallen in. It is notable that the proposed timeframe is far shorter than the SNP felt necessary in 2011 to conduct a campaign that fully explored the issues.

Furthermore, the timing makes even less sense if the object of the referendum is to allow voters a “genuine choice”, because no such choice will exist. Unless the First Minister seriously proposes that a new state could be set up and continued membership of the EU negotiated within the space of a month, Scotland WILL be leaving the EU one way or the other. The choice on offer will be between Brexit inside the union and Brexit outside of the union, with potential for EU membership further down the line. This, of itself, poses a whole host of new issues that did not exist in 2014.

Sincere Co-operation

The position of a territory seceding from a state that itself is seceding from the EU is vastly different from a territory seceding from a fully-fledged Member State. In the latter circumstance, that secession would result in a considerable dislocation in the EU’s single market, which its institutions, and the Member States, would be legally obliged to seek to avoid. As Dr. Kenealy and I argued in 2014

“[t]he need to avoid such a dislocation represents not merely a pragmatic reason for the EU to enter negotiations with Scotland immediately following a ‘Yes’ vote but also a legal reason. Article 4 makes clear that if such negative externalities, as would be created by Scottish expulsion, threaten to compromise the attainment of the EU’s goals, then steps must be taken to avoid them. The task of ensuring that the Single Market does not suffer any sudden, sharp dislocation is one that flows from the Treaties. To allow the EU to stumble, unprepared, into such a scenario by refusing to address the issue of an independent Scotland until Independence Day, would be a violation of the principle of sincere cooperation, bordering on a dereliction of duty by the Commission and the Member States.”

This statement, however, clearly does not apply mutatis mutandis to a post-Brexit scenario. The unavoidable dislocation has already taken place. There is no impending hole in the EU’s single market that the institutions, or the Member States are obliged to seek to avoid.

This does not mean that there is no chance that institutions and Member States will not seek to make and independent Scotland’s transition into the EU as smooth as possible. Certainly, post-Brexit, some within the EU – most notably, Guy Verhofstadt – have made such overtones, seemingly to spite the UK. While a desire to stick-it to the UK among officials may well work to Scotland’s advantage, it doesn’t come close to the EU-wide legal obligation to work co-operatively with a seceding Scotland that previously existed.

Good Will

You wouldn’t have thought it by the end of the campaign, but the first independence referendum actually came about in a spirit of remarkably good will. The SNP, to everyone’s surprise, won a majority in the Scottish Parliament elections with a clear manifesto commitment that an SNP majority in the Scottish Parliament would mean an independence referendum. This, of itself, is at odds with the more equivocal commitment contained within the SNP’s 2016 manifesto.

The year following the referendum, the UK Government and the Scottish Government signed the Edinburgh Agreement, under which the Secretary of State would make an order under s.30 of the Scotland Act 1998 to grant Holyrood the legislative competence to hold a referendum that would “deliver a fair test and a decisive expression of the views of people in Scotland and a result that everyone will respect.”

The present circumstances could hardly contrast more starkly. The First Minister and the Prime Minister appear to be engaged in a game of constitutional “chicken”, and it’s not clear which party, if either, will blink first.

In 2014 I argued, quite sincerely, that from the moment Scotland voted ‘Yes’ its closest ally would be the rest of the United Kingdom. This was not out of some misplaced belief in David Cameron’s (or, more likely, his successor’s) magnanimity; but quite simply because it would be in the UK’s interests. With a similar outlook and so many shared interests, Scotland would likely be a close ally of the UK in the European Council and Council of Ministers, much like Ireland. I have little doubt that the UK Government would have gone to bat for Scotland’s continued membership of the EU. In the present circumstances such good will seems unlikely, and insofar is the EU is concerned, utterly fruitless in any event.

Currency

In 2014 I did not think it was at all likely that Scotland would be compelled to join the Euro. This was not  because I believed that Scotland would inherit the UK’s opt-out, but because the SNP had been explicit in their intention to continue using the Pound Sterling, whether in a formal currency union or not. As Scotland would have not have had an independent currency it would not have been possible for Scotland to join the Euro.

However, having been the Yes campaign’s key weakness in 2014, it is now clear that the “use the Pound, one way or the other” approach is unlikely to be used again. Any plans for independence would likely have to include a plan for an independent currency and central bank. Consequently, the main barrier to Scotland’s being compelled to join the Euro evaporates. All new members of the EU (and make no mistake, Scotland will be a new member) are obliged to eventually join the Euro.

While it is the case that it is possible to contrive to not join, by keeping your currency out of ERM II, as Sweden does, it is unlikely that Scotland would be able to get away with this for too long. The SNP may have to prepare itself to be able to sell the prospect of Scotland using three different currencies within the space of a decade.

Conclusion

The First Minister wishes to present the choice she wishes to put before the Scottish people as between independence within in the EU, or Brexit within the UK. Scotland’s continued membership of the EU was one of the key issues of the 2014 independence referendum, and it is likely that it will be once again. However, while the issues may well be the same, the context is vastly different; and this changed context turns Scotland’s continued membership of the EU from likely in 2014, to nearly impossible in 2019.

Scotland will be leaving the EU. The reality is that the only choice on offer is between Brexit within the UK, or without it. Whether we like it or not, this is the new reality to which Scots voters need to become accustomed, and about which the First Minister needs to be honest. Only then will we have a rational debate about Scotland’s future.

On offshore trusts: the key question David Cameron has to answer

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94364275_davidcameron-news-large_trans++eo_i_u9APj8RuoebjoAHt0k9u7HhRJvuo-ZLenGRumAWhere trusts are concerned, there are three different roles:

  • A settlor (or trustor, more commonly in Scotland), who places the assets into trust in the first place.
  • A trustee, who strictly speaking owns the assets, but not for his or her own beneficial interest. The assets held in trust do not form part of the trustee’s personal assets.
  • A beneficiary, who will ultimately receive the income and/or capital from the trust.

Sometimes, one person can hold more than one role. For example, it might well be that the settlor is also the beneficiary of the trust – but he or she wants to be removed from the day-to-day management of the assets. Similarly, a settlor might also be the trustee, with the intention of protecting certain assets that he or she intends upon passing to their children when they reach a certain age. While in certain trusts, the beneficiaries have a direct proprietary interest in the trust (i.e. a legal entitlement to receive trust income or capital), other trusts are discretionary in nature – whereby the trustees can decide who they make payments to, when they are made, and how much. As there are no fixed beneficiaries of a discretionary trust, no one can be said to be a beneficiary of such a trust until they have actually received a benefit. Nonetheless, most such trusts are set up with a specific understanding that the trustees will make such payments to certain specified persons, notwithstanding their discretion. You literally trust the trustees to act in accordance with your wishes. Such trusts are particularly convenient when you want to conceal the real beneficial owner of assets.

The most common use of trusts, therefore, is for Inheritance Tax purposes. For example, payments into discretionary trusts can create significant tax advantages, as Inheritance Tax is payable at the point at which the money is transferred into the trust (as opposed to when you die) at half the usual rate. A nil-rate band discretionary trust is a common feature in every middle class will (they still have some advantages even following the introduction of the transferrable nil-rate band).

It is particularly common for Members of Parliament to set up trusts for innocuous purposes too. For example, someone who owns a business who is elected to Parliament might well want to return to that business when they cease to be an MP, in which case the wise thing to do is to place their ownership of that business into a trust in order to avoid creating a conflict of interest.

However, offshore trusts are an altogether different animal, with secrecy and tax avoidance at the core of their purpose. For example, trusts pay income tax just like everyone else. So if your plan is to place investments into a trust, and then re-invest the income from those investments so that the value of the trust grows further, the amount that you can re-invest will be curtailed by the fact that every year income tax will be payable on that income before it can be re-invested.

If, however, your trustees are located outside of the United Kingdom, but say, in a tax haven, then that recurring income tax is no longer an issue. The capital held in the trust can grow and grow, free from the encumbrances of recurring taxation. Tax is only payable in the UK on a remittance basis – that is to say when a UK-resident beneficiary receives a payment out of a trust he or she must declare that payment as part of their tax return. The beauty part is that this only happens once, rather than annually, and payments can be deferred until necessary or convenient.

This is why the explanations given by David Cameron in response to questions about their own interests in offshore trusts have been far from comprehensive.

Yesterday, David Cameron said

“I have no shares, no offshore trusts, no offshore funds, nothing like that. And, so that, I think, is a very clear description.”

Except that it’s not a very clear description at all. What did Dave mean by that? Does he mean that he has never set up a trust? That he’s not a trustee? That he’s not a beneficiary of any trust? This not-very-clear answer prompted Downing Street to issue another statement, denying that the PM or his family “benefit from any offshore funds”, with the seemingly deliberate present-tense of that denial raising more questions than it answered. The subsequent denial is more unequivocal, declaring that there are “no offshore funds/trusts which the prime minister, Mrs Cameron or their children will benefit from in future.”

From this, therefore, it is clear that the Prime Minister does not benefit from any offshore trusts, nor does he have any beneficial interest in any offshore trusts from which he can call in future. But what about one of those discretionary trusts, mentioned above? While it’s entirely possible to say quite unequivocally that you will not benefit from interest-in-possession trusts, it is impossible to say with any certainty that any of us will never be the beneficiaries of an existing discretionary trust in the future. The nature of such trusts is that they are discretionary, and a trust in which someone has no direct beneficial interest might, nevertheless, some time down the line, exercise their discretion and start making payments to you.

This is where the Prime Minister’s explanation is still inadequate. While the Telegraph has posed three questions that the PM still needs to answer, the key question is this: did Ian Cameron set up any discretionary trusts? If he has, then the persons to whom that trust has made payments in the past will be the best indicator of the sorts of persons to whom such a trust will make payments in the future.

I feel slightly sorry for David Cameron – he has clearly hasn’t done anything wrong. His father was a shrewd high-financier, who will doubtless have gone to considerable lengths to ensure his family was provided for. How was he to know that Baby David would grow-up to be Prime Minister? If Ian Cameron did set up an offshore discretionary trust with his children as intended beneficiaries then Dave can hardly be blamed for that. What the public is, rightly, concerned about, however, is the perception that the government’s inaction on tackling this sort of avoidance might, perhaps subconsciously, be due to a feint expectation by the Prime Minister and the Chancellor that they too might, sometime down the line, be the beneficiaries of such trusts. This is why nothing short of full disclosure will settle the issue, and the sooner that happens the less painful it will be for everyone.

What does Cameron want from the EU?

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It’s a sorry state of affairs for an avowed socialist to find himself in agreement with David Cameron, but as one of the few Eurosceptic EU Lawyers out there it happens to me more times than I’d care to admit. However, David Cameron’s latest attempt to win over the Euro-phobic right of his party has even this Eurosceptic scratching his head.

It is a particularly poor negotiator who goes into a negotiation without knowing what he wants, however for the moment, at least, David Cameron’s position appears to be exactly that. What precisely is David Cameron going to go into a negotiation and ask for? The UK already opts out of Economic and Monetary Union; the Schengen Area; and the Charter of Fundamental Rights. We opt-in to Freedom, Security, and Justice. Defence and Foreign Policy could easily be opted-out of, but it’s so unsubstantial it hardly seems worth it. David Cameron would, surely, be wary about negotiating in the Citizenship policy area for fear of harming the single market.

 “Let’s opt out of plant patents – that’ll keep Nigel Farage happy!”

That leaves tinkering at the edges: the Common Agricultural and Fisheries policies; various EU quangos such as the European Space Agency, European Agency for Safety and Health at Work, or the Community Plant Variety Office; or perhaps renegotiating the odd veto in certain policy areas. Such modest reforms would neither placate the Eurosceptics to David Cameron’s right, nor look like a substantial win for Britain by the Prime Minister.

I’m in no doubt the the European Union is in dire need of substantial reform. But one man’s crusade to secure a few more opt-outs isn’t going to curb the rampant and unaccountable bureaucracy that is the European Commission; it won’t close the legitimacy gap between citizens and the European Parliament; it won’t reorganise the hierarchy of norms, or restore sovereignty to Member States; and it won’t halt the proliferation of nonsense decisions and garbage jurisprudence from the Court of Justice of the European Union. In order to achieve any meaningful reform of the EU, David Cameron needs to be a team player – and not a pariah on the lunatic fringe.

 

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