Overview
The broad principles of how VAT, customs procedures and regulatory checks will operate in Northern Ireland, for goods moving between NI and GB in both directions as well as goods moving between NI and the Republic of Ireland/EU (in both directions), are set out or implied in the Protocol.
However, the exact functioning of the regime will be ‘fleshed out’, only by rules made following the discussions in the Joint Committee – the body made up of representatives from the EU and the UK that will come into operation post-Brexit, during the transition period. It is not clear at present, to what extent the Northern Ireland devolved institutions will be able to have input into such discussions, as is intended.
The Withdrawal Agreement between the EU and the UK provides
The Joint Committee shall adopt before 1 July 2020 the detailed rules relating to trade in goods between the two parts of the single customs territory for the implementation of this paragraph. In the absence of such a decision adopted before 1 July 2020, Annex 3 shall apply.
Annex 3 is the existing EU Rules unmodified.
The Withdrawal Agreement Bill itself does not specify the detail of the new UK customs rules between Northern Ireland and GB. This has the important consequence that a lot of the detailed rules, do not yet exist. Accordingly, we speculate on the likely shape of the rules in view of the terms of the Withdrawal Agreement and the various other constraints, as well as past practice.
The detailed rules will be made by ministerial order in the future. They are likely to be made at some point during the transitional period and may be made well in advance of the effective exit day. Traders should follow publicity in the media or trade journals.
The Withdrawal Agreement Bill creates powers to enable the future detailed rules to be made by UK government ministers pursuant to regulations. These regulations would be so wide-ranging that they are referred to as so-called “Henry VIII” clauses. This means that unlike most regulations made under the legislation, they will be more like primary legislation (made by parliament) and will have the ability to amend primary legislation.
Withdrawal Agreement Principles for GB to NI imports
In effect, processes that normally apply on goods entering the EU will be implemented at the Northern Ireland / rest of the world border or on trade between Great Britain and Northern Ireland, at the NI/GB “border”. This will mean that goods entering Northern Ireland destined for the EU must pay the appropriate tariff and be subject to the appropriate procedures, either on import from GB or elsewhere in the rest of the world.
Where a NI business supplies goods imported from GB in NI in all or almost all cases it may be possible to establish systematically that the goods are not EU destined goods for the above purposes and accordingly should be subject to a lesser degree of controls and scrutiny and in particular, would not be subject to any EU duties
The NI Protocol applies to make Northern Ireland part of the EU customs territory for almost all practical purposes. However, Northern Ireland businesses would receive the benefit of any favourable UK trade agreements in the case of imports into NI from outside the EU where there is a more favourable tariff rate under a UK agreement with the country than an EU agreement with the country, or where there is no EU agreement with the country, but there is a favourable UK agreement.
Goods moving from Great Britain into Northern Ireland would not be subject to customs duties unless there is a risk that the goods would be destined to be used in the EU. Goods imported into Northern Ireland would be presumed to be EU Destined Goods unless they meet the two following cumulative conditions:
- they are not subject to commercial processing in Northern Ireland, such as alteration or transformation of the goods other than for the purpose of preservation, marking or any other documentation activity to ensure regulatory compliance; and
- they fulfil certain criteria to be defined jointly by the Joint Committee (comprised of EU and UK officials) prior to the end of the transition period.
The NI Protocol provides that customs duties charged for EU Destined Goods entering in Northern Ireland would be retained by the UK and not remitted to the EU budget.
The Withdrawal Agreement provides
Before the end of the transition period, the Joint Committee shall by decision establish the criteria for considering that a good brought into Northern Ireland from outside the Union is not at risk of subsequently being moved into the Union. The Joint Committee shall take into consideration, inter alia
(a) the final destination and use of the good;
(b) the nature and value of the good;
(c) the nature of the movement; and
(d) the incentive for undeclared onward movement into the Union, in particular, incentives resulting from the duties payable pursuant to paragraph 1.
The Joint Committee may amend at any time its decisions adopted pursuant to this paragraph.
Procedures on GB to NI trade
What follows is speculative for the reasons set out above. Although the exact rules are to be made, it does appear clear that there would be both import declarations and entry summary declarations. The latter is a notice of the movement by the carrier where the goods are brought from Great Britain to Northern Ireland.
There is very little official guidance on the October 2019 NI Protocol. The following was published in relation to the earlier version the so-called backstop which in this regard and very similar principles.
The operational regime would ensure that relevant information will be provided on goods moving from Great Britain to Northern Ireland through appropriate declarations, in order to provide for a risk-based approach to assessment and checks.
Ensuring Northern Ireland continues to be able to operate the EU’s VIES system to share data with Ireland will require alignment with EU VAT rules with respect to goods, and therefore the information declaration requirement referred to above will be necessary for VAT purposes. However, Northern Ireland will remain part of the UK’s VAT area; with HMRC responsible for operation and collection of VAT, and for the setting of VAT rates, across the UK in line with the Northern Ireland Act 1998. Specifically, the UK will ensure that no registered business is required to pay VAT upfront when moving goods between Great Britain and Northern Ireland and that accounting for VAT can continue to be done through postponed accounting and UK VAT returns.
- There are different potential approaches that could be adopted to give effect to these Articles. For example, the European Commission has proposed that transit procedures currently operating for some movements of goods within the European Union would allow goods to move smoothly from Great Britain to Northern Ireland in a way that facilitates trade and business (see, for example, the infographic which the European Commission has published). Both parties note that it would be for the United Kingdom or Northern Ireland authorities as appropriate to operate this system.
Parliamentary impact assessment report
When the Withdrawal agreement Bill was brought before Parliament in October, the UK government was obliged to publish an impact assessment of the legislation on business. This contains useful information on the UK government’s thinking and understanding of the NI Protocol provisions regarding import and export procedures.
The report confirms that there will be familiarisation costs and ongoing costs for completing administration movement of goods between Great Britain and Northern Ireland.
- The Protocol provides that Northern Ireland is in the UK customs territory. These provisions ensure that an open border is maintained on the island of Ireland. Any processes normally required on goods entering the EU will be implemented at the Northern Ireland-Rest of World border or on trade moving East-West between Great Britain and Northern Ireland. For as long as Northern Ireland participates in the customs arrangements and regulatory zone, there will, therefore, be processes to ensure that goods entering Northern Ireland destined for the EU pay the right duty and that all goods comply with the appropriate rules. These processes will be largely electronic in nature and any checks on goods will principally relate to regulatory alignment rather than customs compliance (noting, for example, that the UK currently checks only 4% of movements notified through customs declarations, with under 1% involving physical checks of the consignment). Businesses in Great Britain and Northern Ireland may face familiarisation costs in adapting to the new customs processes, such as the requirements for customs declarations, in particular, if they have not undertaken such processes before.
4.5.1.2 East-West
Goods moving from Great Britain to Northern Ireland will be required to complete both import declarations and Entry Summary (ENS) Declarations because the UK will be applying the EU’s UCC in Northern Ireland. This will result in additional administrative costs to businesses.Businesses that do not currently trade outside the EU will incur familiarisation costs as they have not had to engage with customs processes before.
Due to data limitations around the number and nature of consignments of goods being moved from Great Britain to Northern Ireland, it is not possible to estimate the associated administrative burden on businesses. HMRC has produced estimates of the administrative burden to traders on a per declaration basis, based upon historical UK-RoW trade. This ranges from £15 to £56 per declaration, depending on factors such as whether a business outsources the process to a customs agent, but it may not be possible to translate the same estimates to Great Britain to Northern Ireland movements.
Small and micro businesses (SMBs) may be more likely to use a customs agent and as such are more likely to face higher costs, though the use of agents could reduce both familiarisation costs and any other burdens associated with the process.
In a no-deal scenario, there would be no customs costs for businesses moving goods from Great Britain to Northern Ireland. The Protocol would result in additional costs as described above.
Leaked Treasury document
An internal UK Treasury discussion document was leaked during the 2019 election campaign. It is helpful to some extent in looking at Treasury’s view of the likely position.
The implication of NI being for most practical purposes in the EU customs union and of the above technical explanatory note is that there would be likely to be something like the standard EU import customs procedures on purchases from GB into NI. The Treasury document also assumes that there will be customs declarations on purchases from GB into NI.
It seems less likely that the UK would apply a requirement for an export declaration and export procedures on the GB seller. This would imply that the seller on the GB side would not be subject to any further requirements than those applicable to a GB sale. The above-mentioned leak Treasury document places a “question mark” in relation to this issue. However, as it would not be something required by the EU but rather by UK interests, the UK might be willing to dispense with it.
The above leaked Treasury document also states that safety and security import procedures and declarations will also be required from the carrier. As set out separately, safety and security import declarations are effectively a subset of an import customs declaration containing “bare bones” information only about the goods and the parties but without duty calculation.
Given that in the case of EFTA trade (Norway & Switzerland), trade safety and security declarations are not required, it is possible that they may be dispensed with eventually.
The Treasury document also says that origin requirements would apply so that where goods are being purchased and brought from GB to NI in circumstances where there was a trade agreement, it will be necessary to show UK origin in order to qualify for this lower zero rate. This would require the exporter to furnish proof that the goods were of EU or UK origin. However, this would not be relevant if the goods are to stay in NI, which will usually be the case with the company’s goods.
Nature of the likely procedures
In view of the requirements of the Withdrawal Agreement and the material so published by the UK Parliament or leaked it seems likely that there will be both safety and security declarations (known as entry summary declarations) primarily the responsibility of the carrier and import declarations, likely to be the company’s responsibility as importer of record. They may be undertaken either by the NI “importer” itself using software or the carrier / freight forwarder and effectively as a customs agent for this purpose.
The template for customs declarations worldwide is the single administrative document which is a form populated with coded data containing essential details of the import (export or other) transaction. As is the case generally, only certain boxes or part of the form would need to be completed in any case. Generally, the form would require to be completed prior to importation.
The data required for the entry summary declaration, i.e. the safety and security declaration mentioned may be fully or almost fully contained in the import declaration. This means that the NI “importer” could choose to make an import declaration by getting some of the key transport information from the carrier in advance and furnish the carrier with a completed declaration and the applicable movement reference number from HMRC. This would take most of the burden from the carrier in terms of completing the entry summary declaration and would effectively indirectly complete the safety and security declaration.
The carrier would generally also have to include the details on a manifest, but this may not apply for NI GB trade.
The actual information required for NI GB trade is likely to be the absolute minimum necessary for the purpose of risk assessment. If traders could show there was a low risk of them being moved onto the Republic of Ireland/ EU d, the level of procedure applicable would be minimal.
The exact extent of the data required will not be known for some time.There is an intention to complete the rules during the course of 2020 on the basis of the targeted exit date of 2020 by the UK.
Value Added Tax
It is very difficult to see from the information available what the changes to value-added tax might be for GB to NI trade under the NI Protocol. On the one hand, there is a single UK wide value-added tax, and this will not readily change. On the other hand, some aspects of the system will need to change for the NI element of UK VAT to interlock with the requirements of the EU VAT system.
The Withdrawal Agreement provides that for some purposes Northern Ireland is to be part of the EU VAT territory whereas for other purposes it is part of the UK VAT territory. The EU Commission has published the following
What about VAT?
Northern Ireland will remain part of the UK’s VAT area, with HMRC remaining responsible for applying VAT legislation, including the collection of VAT, and the setting of VAT rates. The UK will keep revenues accruing from this tax. In order to avoid a hard border on the island of Ireland, while protecting the integrity of the Single Market, the EU’s VAT rules for goods will continue to apply in Northern Ireland.
In addition, VAT exemptions and reduced rates applied in Ireland may also be applied in Northern Ireland in order to avoid distorting the level playing field on the island. Northern Ireland continues to be able to operate the EU’s VIES system (VAT Information Exchange System) and to share data with Ireland and the other Member States.
The UK Parliament impact assessment states that the matter of VAT is subject to further discussion and “that specific practical arrangement will be the subject of discussions within the Joint Committee Parliamentary impact assessment report says that it cannot comment further for this reason.”
VAT Scenarios
Broadly, there are two alternative scenarios as to how VAT may work in Northern Ireland under the NI Protocol for GB / NI trade. It seems to us, more likely that GB and NI will remain part of the single UK VAT area. Accordingly, sales by GB suppliers to traders as a NI business would be subject to standard rate VAT at 20% which traders would pay. In the normal course, traders would be able to (presumably) reclaim this as part of traders’ inputs against traders’ sales, where that traders’ businesses are fully “vatable”.
VAT is a domestic tax, unlike customs duty. The broad parameters of the rules are set by EU law. However, each EU member and the UK as a quasi-member for NI would set its own VAT rules. In principle, it does not seem incompatible with continuing membership of the EU VAT arrangements that NI would have a single UK wide system of VAT. There may be complex technical issues, but such a result would be politically, and economically desirable.
Unlike customs duties, the proper VAT treatment would not normally change simply because the goods are later sold on into the RoI/ EU from Northern Ireland. There is nothing incompatible with a single UK wide VAT system which requires additional controls when goods are sold from Northern Ireland to the Republic of Ireland (or elsewhere in the EU or from the Republic of Ireland to Northern Ireland. The same treatment as applies at present (pre2021) would apply and it is irrelevant whether the goods move out of Northern Ireland, as is the case at present.
The other alternative is that Northern Ireland and GB are separate VAT areas in which event a sale by UK supplier would be akin to a zero-rate export with a purchase by the company into NI from GB the equivalent of an import. If this logic was to be followed through, VAT would be payable at the point of “import”.
However, even in this case, the practical effects would be likely to be minimised. The 2019 proposed no-deal mitigations in the UK allowed for VAT postponed until the next VAT due date (and not just the 15th of the next month as is standard with VAT deferrals) with the effect that there would be no cash flow implication that would otherwise arise in this scenario. Even if the UK sought to have separate NI and GB VAT areas, then if postponed accounting was allowed, then for most simple sales with the goods moving from the GB supplier to traders the net effect might be no different and would be more favourable in cash-flow terms.
A guarantee might ultimately be required to allow for postponed VAT accounting. However, we would again expect that the UK would not want to put burdens on NI business of this sort.
We believe that the possibility of splitting the NI and GB VAT areas would be very anomalous as the NI Protocol applies only to goods and not to services. The treatment of services throughout the UK for VAT purposes would be identical so it would seem anomalous and unnecessary to have separate NI and GB VAT areas. Therefore, we believe that the former rather than the latter scenario would apply. Even in the latter scenario, postponed accounting would greatly ease the position and bring it close to the present case.