Brexit VAT and customs changes rushed through Parliament

11 Dec 2020

Legislation to establish the special VAT and customs regime that will apply in Northern Ireland from next month, and to scrap low value consignment relief across the UK, has begun its passage through the UK Parliament ahead of the end of the Brexit Transition Period at the end of the month.

In a written statement on 8 December, prior to the Bill’s publication, the Financial Secretary to the Treasury Jesse Norman told MPs that: “The Government has today tabled resolutions for the Taxation (Post-transition Period) Bill as part of its preparations for the end of the Transition Period. The Bill will take forward changes to the tax system to support the smooth continuation of business across the UK. It will ensure legislation required for the purposes of VAT and customs and excise duties to support the practical implementation of the Northern Ireland Protocol is in place by the end of the Transition Period. It will also implement further changes to the tax system which are required ahead of the end of the Transition Period, including the introduction of a new system for collecting VAT on cross-border goods.”

MPs debated the Bill at second reading and committee stage the following day, and its remaining Commons stages are scheduled for Tuesday next week. As a Money Bill the Bill will be debated, but not voted on or amended in, the House of Lords. That will be on Wednesday.


Programme motion

Before second reading debate on Tuesday Labour spokesman Pat McFadden (pictured thanks to Parliament UK) used the brief debate on the programme motion to criticise the rushed passage of the Bill.

“After four years, we have a Bill on the taxation arrangements after Brexit that is to be debated in less than four hours. Not only that, but it is a Bill of over 100 pages in length that was published less than 24 hours ago. The Minister may claim that the House has passed emergency legislation in a single day in the past, and of course that is true: the House can do that in emergency circumstances. But this deadline that we face at the end of the year is not new. It is not a surprise. It has been known ever since the withdrawal agreement was reached. The Government have said repeatedly over the past year that this was an immovable deadline. So why is it, just three weeks before that deadline, that the Government are only publishing these arrangements and this timetable now?”

The Financial Secretary to the Treasury (FST), Jesse Norman MP, responded to McFadden, saying: “the Government have been moving at great speed, and much of the regulation is already in the public domain, together with an enormous amount of further communications and support systems. The Government are putting in front of the House today a Bill that encodes the Northern Ireland Protocol and a Command Paper that has been in the public domain for many months, and if the right hon. Gentleman wished to have more scrutiny, he perhaps might have considered not having a debate on this motion.”

Second reading debate

The Government

The second reading debate took a little under two hours. It was opened by the FST Jesse Norman. Norman said the Bill will provide legal certainty for the customs, VAT and excise systems in Northern Ireland after the end of the transition period. VAT in Northern Ireland (NI) will be subject to the EU principal VAT directive, and for that purpose the ECJ will be the judicial body/ultimate arbiter. Excise processes in NI will be carried out by HMRC.

The Bill allows the Government to put in place decisions made by the Joint Committee on goods that are not at risk of entering the EU, so they do not have to pay the EU tariff. The classes or categories of goods or movements that are at risk or not at risk will be set out by regulations once legal texts have been formally adopted. The ‘at risk’ or ‘not at risk’ definitions will also determine whether the UK or EU tariff applies when goods arrive in NI from rest-of-the-world countries.

The Bill will ensure that EU goods moving into NI remain free from customs duties or processes, said Norman. In addition, this legislation will ensure that the UK customs regime applies to goods moved from NI to GB if they do not qualify for unfettered access. The Bill will also introduce anti-avoidance rules to prevent goods from being rerouted through NI to avoid UK customs duties or associated obligations, and its measures will ensure that customs enforcement and penalties, along with review and appeal processes, are in place in relation to duty; and that they continue to work alongside EU legislation in NI and can be applied, where required, to movements of goods between NI and GB.

The Bill also amends and modifies certain provisions in relation to VAT and excise for NI. The legal basis on which VAT is charged will change but the experience of those who pay VAT will be very similar, if not identical to today, the minister told the House.

Existing rules in relation to movements of goods between NI and the EU, including the rules relating to acquisitions and distance selling, will continue to apply. Goods entering GB from NI will be subject to VAT as though they were imports under the relevant UK legislation. Similarly, goods entering NI from GB will also be subject to VAT as though they were imports and relevant EU or UK legislation will apply.

In addition, the Bill amends current legislation for excise duty to be charged when certain goods, such as alcohol and tobacco, are moved from GB to NI.

In line with the protocol, NI will maintain alignment with existing EU excise rules, he said.

The Bill introduces a new system for collecting VAT on cross-border goods. That includes moving VAT collection on certain imported goods away from the border and involving operators of online marketplaces in the collection of VAT at the point of sale.

In addition, measures in the Bill will remove the VAT relief on imported low-value items so that VAT will be due on all consignments, irrespective of their value. The relief has been the subject of long-standing abuse and it will level the playing field for UK businesses still further by protecting high streets from VAT-free imports. Together, he claimed the changes will improve the effectiveness of VAT collection on imported goods, tackle non-compliance and protect flow of goods at the border.

The Bill also includes a clause to ensure HMRC has access to the same or similar tools to prevent insurance premium tax evasion as it does at present, regardless of whether an insurer is based in an EU member state.

Norman concluded his speech by saying the Bill introduces new powers that will enable HMRC to raise tax charges under the controlled foreign companies legislation for the period from 1 January 2013 to 31 December 2018.

Labour’s response

Labour Shadow Chancellor Anneliese Dodds responded by saying many of the clauses in the Bill, particularly those covering customs and excise duties, require the Treasury to make regulations that will set out the actual detail of its proposals later, so even with the publication of the Bill, businesses and individuals still do not have the information they need to prepare for the end of the transition period.

Dodds cited the Public Accounts Committee and its concern at reports from industry bodies that the Government has not provided the key information needed for businesses to prepare. Indeed, the Committee indicated that more than a third of small and medium-sized enterprises still believed that the transition period would be extended, she said.

The Cabinet Office has admitted that it is well behind in recruiting the customs agents desperately needed for 1 January 2021, despite more than £80 million having been spent so far. Overall, £4.4 billion has been spent by the Government on preparations for Brexit and the end of the transition period, yet we are still not ready, she said.

Yesterday morning, the Business, Energy and Industrial Strategy Committee heard from the Food and Drink Federation, which said that the guidance being published now was already too late. Some 43 per cent of its members who supply NI have said that they will not do so in the first three months of next year. TheCityUK said that in the worst-case scenario, 40 per cent of the UK’s EU-related financial activity could be lost.  She said: “With that in mind, Labour supports this Bill passing. [Businesses] At the very least, they need a timetable for the provision of that greater certainty. They need to know what rules of origin will apply from 1 January. They need to know when appropriate tariff codes will be published. They need to know whether the Government will be providing easements.”

Businesses need to know whether there will be a pause in penalties arising out of this legislation, said Dodds. They need to know whether the measures in the Bill countermand the existing guidance provided to Northern Irish businesses, some of which was updated just on 7 December. They need to know whether and when the information on the trusted trader scheme for Northern Irish business is going to be fully published, so that businesses can follow that scheme.

Conservative backbench contributions

Sir William Cash said a final post-Brexit agreement must not be allowed to undermine the unfettered sovereignty of the UK Parliament.

John Redwood is not satisfied yet that we have a working operation for the NI border and ‘more precisely, who controls the taxation’. He said: “It is extremely difficult for individuals and businesses to have to respond to two legal jurisdictions on tax in the same place, yet we seem to have both an EU VAT system and a UK VAT system. I hope that the UK VAT system will deviate rather more from the EU one and be friendlier, lower and apply to different things, but the more that that happens, the more difficult it will be if we are trying to enforce two different VAT systems in one part of the UK.” We need to know how this electronic border will be programmed to deal with the competing jurisdictions and competing incidences of taxation, he added. He complained that the ultimate authority on the EU part of VAT and excise will be the European Court, and therefore there are likely to be inspectors and invigilators interfering in the process within what should be sovereign UK territory.

Katherine Fletcher said the Bill will change and improve our tax system, such as levelling the playing field by making online marketplaces account for their VAT.

Andrew Jones supported Fletcher’s point, saying today high street businesses and online players based here pay VAT, so if overseas businesses are allowed to make VAT-free sales, domestic businesses are unfairly undercut.

Miriam Cates said the Bill introduces some administrative and procedural VAT changes that not only are legally necessary but allow us to tackle non-compliance and to support our high streets to compete with online sales. And another opportunity after the end of the transition period is our potential ability to crack down on tax evasion.

Jerome Mayhew said the charging of customs duties and VAT away from the geographical border with the Republic of Ireland while continuing to protect the ability of Northern Irish products to travel without restrictions to the rest of the UK. This respects the Government’s commitment that goods from NI will continue to have unfettered access to the rest of the UK, he claims.

Kevin Hollinrake likes VAT because it is much more difficult to avoid than other taxes and much easier to collect. It is not a regressive tax, he claimed, and MPs should try to focus on indirect taxes as we reform taxes in the future and simplify the tax system.

It is quite right that our red line in this Bill has been the ability to set our own customs laws and excise duties, said Shaun Bailey, and we are going to see the benefit of that in January, with the streamlining of some 6,000 tariff lines and the removal of tariffs on some £30 billion of imports entering supply chains, particularly within manufacturing.

Other opposition contributions

For the SNP Alison Thewliss said the trusted trader scheme is subject to review three and a half years after the NI protocol begins, but what mechanisms exist to hold it to account in the meantime to ensure that it is effective and that it does not have a distorting effect, ‘which we suspect that it may do’? Any deal that delivers a differentiated settlement for NI beyond the differences that already exist on an all-Ireland basis (e.g. agriculture), or can be brought under the provisions of the Belfast Agreement, would undermine the integrity of our UK internal market and the UK, she said.

Stephen Flynn (also SNP) hopes the Government revisit the issue of the digital services tax, where they have the powers to make further inroads into levelling the high street v online playing field.

Toby Perkins (Labour) complained that the promise that Northern Irish people will be able to enjoy frictionless trade has been exposed as wrong.

Lib Dem Alistair Carmichael remarked that once sovereignty trumps economics, that inevitably leads to having borders.

Stephen Farry of the Alliance Party of Northern Ireland said although we have the prospect of the authorised economic operator model, it is not going to cover everyone. For example, it is not going to cover small retailers and it may not cover the online issue.

Closing speeches

From the Labour frontbench Pat McFadden complained that after four years, the public, companies and their staff do not know what they will be facing in January, and the root of that decision remains what it has always been: this choice between sovereignty and market access.

Exchequer Secretary Kemi Badenoch closed the debate by claiming the trader support service is working and since the launch of the registration portal in September, more than 18,000 businesses have signed up for support. She said the bill tackled low-value consignment relief, which is subject to widespread abuse and contributes to trade distortion. The reason it does not apply to high value goods is that the £135 threshold aligns with the threshold for customs duty liability. The OBR has forecast that these changes will raise over £300 million a year over the next five years, and £1.6 billion over the scorecard period, she said.

The minister explained that the ECJ will continue to have a role where EU directives apply in NI. But the rules will continue to be policed by HMRC, which will continue to be the tax authority for the whole of the UK. NI is and will remain part of the UK and its VAT system. It is correct that the NI protocol means that NI will continue to align with the EU VAT rules in respect of goods, but not services. That is to ensure that trade is not disrupted on the island of Ireland, and to allow us to meet our commitments under the Belfast/Good Friday agreement. She closed by saying when the NI protocol comes into effect, NI businesses or consumers purchasing goods from VAT-registered businesses will see no significant difference in costs from a VAT perspective.

Committee stage

A brief committee stage on the floor of the House saw just four MPs contributing, and just half of hour of discussion. The 12 clauses, 4 schedules, 3 amendments and 2 new clauses were all debated together.

The first speaker was Pat McFadden from Labour’s Treasury team. McFadden again focused his remarks on the extremely tight timetable for the measures being brought in by the Bill. He noted that the protocol and arrangements agreed the previous day by the UK and EU create new requirements for businesses, in relation to Northern Ireland, to be set out in regulations. He said the Government should acknowledge this was ‘a new regime with new requirements’.

“Businesses in Northern Ireland and those that do a lot of trade with Northern Ireland will be asking, “What does this mean for me? What processes do I have to go through? What do I have to pay? If the goods remain in Northern Ireland, will I be entitled to a rebate if I have paid? How will I claim that rebate? How will this system work?” Those are all legitimate questions about the new regime being introduced by the Bill and the regulations enabled by it,” said McFadden. “Amendment 2 asks the Treasury to reach conclusions and to publish answers on these matters in the coming days. Frankly, it is already too late to expect businesses to absorb more than 100 pages of legislation within a few weeks. But even if it is too late, we cannot afford more delay, which is why our amendment calls for the publication of guidance on this within a few days of the Bill coming into force.”

He noted that the Exchequer Secretary had said she was sure this could all be done by 1 January. “Let us hope that she is right. The amendment asks for the Government to outline precisely how these duties and tariffs, if they are necessary, will be rebated. Businesses will be asking that question and, quite reasonably, they will want an answer.”

Labour’s new clause 2 “is an attempt to give both Parliament and the public some timetable—some road map—for the blizzard of regulations that are enabled by the Bill and to secure a report on their impact in the future,” McFadden continued. “As I said, this is a new regime. The Bill legislates for something that we have not had to do before in the United Kingdom, and we should at least have the courtesy of reporting on how it is operating in the future.”

Alison Thewliss, for the SNP, expressed concerns about the scrutiny aspects of the Bill. “It is a thick and substantial Bill that gives substantial powers to the UK Government to move things through this House under the negative procedure, which gives very little opportunity for us or anybody else to scrutinise their proposals. We wish to see the proposals come under the affirmative procedure wherever possible, to allow extra scrutiny of the Government.” This was the purpose of the SNP’s new clause 1 and amendment 1.

Thewliss noted the problems of complex supply chains for the movement of food, chemicals and manufactured goods. “In my constituency and in the constituencies of some of my colleagues, for example, we have manufacturers of leather, who move raw hides from Ireland to the west of Scotland. They need to know how they will be able to move these goods through different territories, as they really should not be left hanging about for any length of time; they need to be moved quickly to where they are processed. We do not know whether they would fall under what the Government have termed “at risk goods”.”

There was just one backbench speaker. Conservative MP Andrew Griffith welcomed the Bill as “a building block on the way to regaining our national self-determination in this very important area.” Opposing the amendments, he said we should recognise “that we are in a fast-moving environment. The Treasury team have been working incredibly intensively in the context of the pandemic and I think it is unfair to impose on them a specific timeframe when I know they will… use their very best endeavours to give the very greatest amount of certainty as quickly as possible.” He expressed particular support for “the absolute game-changer that is contained within clause 7 to crack down on the leakage of the important tax revenues that fund our valued public services, and, most importantly, to create a level playing field for the nation’s small and online retailers”.

Griffith accused Thewliss of taking ‘an 18th-century approach to customs, borders, forms and tariffs’ when we are in ‘an age of online forms and digital electronic surveillance’. Thewliss asked him whether he was aware that the Treasury Committee had been told that the UK could have adopted the French customs system, which was up and running before ours? “Technological solutions exist, but they do not exist in the UK, and we do not have them up and running to get this moving by the turn of the year,” she argued. Griffith begged to differ, saying there would be ‘different systems for different territories, but on the business side of things there is already sophisticated tracking of stock, sales and data, which can be used to feed into accounting systems’.

The FST, Jesse Norman, responded to the debate for the Government. He claimed it was “a measure of the wide gulf between the House’s professed intentions and its actual activities that we are about to wind up within a very few minutes, and nothing like to time, the scrutiny of the Bill in Committee.” He said the Government were aiming to make the changes at the end of the transition period ‘as easy and as frictionless as possible for all parties concerned’. The minister said that the Trader Support Service, which was launched on 28 September, has 18,000 subscribers already.

Responding, Pat McFadden challenged an assertion by the minister that guidance had been published in October, saying “he cannot be referring to the guidance referred to in clauses 1 and 2, which talks about the regulations under the Bill.” However, he added, “on the basis of the whole debate, we will not press the amendment to a vote tonight, so I beg to ask leave to withdraw the amendment.”

Amendment 1 (SNP) was moved and was defeated 257-350.

By Hamant Verma.