The Ireland/Northern Ireland Protocol (“The Protocol”) is legally effective from 1 January 2021 irrespective of whether a Free Trade Agreement (FTA) is agreed or not. And with the deadline approaching fast, it is alarming that there are so many unanswered questions.
The Protocol is a compromise between the UK and EU designed to avoid a hard border on the island of Ireland (without getting into the thorny issue of borders in Ireland, let us just say a hard border would be a very damaging backward step both politically and economically).
When people voted in the Brexit referendum (and the majority in Northern Ireland did not vote for Brexit), my impression is that not too many people considered the implications for customs and regulatory borders.
But for Brexit to happen, new borders between the UK and EU are required. As it was agreed that these borders should not be on the island of Ireland, the Protocol was created and it sets out the legal framework that requires Northern Ireland to comply with EU Customs rules, EU Single Market rules and also EU VAT and excise rules relating to trade in goods (the de facto border for the purposes of operating the Protocol will therefore be in the Irish Sea).
Just to complicate matters the Protocol does not apply to trade in services, so in respect of services Northern Ireland will comply fully with UK rules.
So far so good - well not really; it is fair to say that making the Protocol workable has greatly exercised the minds of a wide range of stakeholders in Ireland, both North and South, for almost a year now since it was first announced. These stakeholders include a wide range of businesses that will be affected directly, tax professionals such as myself who are trying to advise businesses on how best to plan, as well as the policy makers and politicians and all of this in the middle of the COVID-19 challenges. With less than three months to go before the transition period ends, much clarity is still required.
The EU and UK both want appropriate checks and controls in place before the end of the transition period to make sure Northern Ireland does not become a back door into their respective jurisdictions, but there are clearly differences in how the parties think this should be achieved. The UK Government committed to ensuring that Northern Ireland businesses will have unfettered access to sell their goods into the GB market (‘GB’ in this article refers to England, Scotland and Wales, excluding Northern Ireland). On the 7 October 2020 the UK Government published its statutory instrument, which is referred to as a Phase 1 definition for “qualifying NI goods” for the purposes of NI-GB unfettered access. On an initial reading it applies a broad definition with the aim of maintaining the status quo as far as possible but we will have to see the detail and also how this develops when the next phase is introduced.
The UK Government has confirmed that customs declarations will be required on imports of goods from GB into Northern Ireland and they recently launched the new Trader Support Service (TSS) which will be a free service for a period of two years to assist businesses to deal with declarations. There is some concern as to whether this will be ready for 1 January 2021 but let’s see!
Running alongside the TSS in Northern Ireland will be a new pre-lodgment model known as Goods Vehicle Movement Service (GVMS), an IT platform that will track the movement of goods on lorries and ships and enable HMRC and border control agencies to make interventions and carry out checks as required.
How VAT rules will apply in Northern Ireland still requires further clarity. As the Protocol only covers goods but not services, this means that EU VAT rules will apply to goods but UK VAT rules will apply to services in respect of Northern Ireland (“a dual VAT system”).
The EU have indicated in numerous technical papers that supplies of goods between Northern Ireland and GB are to be treated as exports and imports for VAT purposes. While the UK Government have yet to comment, this issue needs to be made clear quickly for Northern Ireland businesses that will be required to operate any changes to the VAT system from 1 January 2021.
As yet there is no clarity from UK Government on how B2C supplies will operate between GB and Northern Ireland and whether this will ultimately lead to price increases due to increased operating costs for suppliers.
The Protocol says that any reduced rates or exemptions that apply in Ireland could be applied in Northern Ireland. However, this will be for the UK Government to decide to apply these rates at their discretion and these variances will only arise over the longer term.
Important to note that under the Protocol, Northern Ireland will still be bound by the jurisdiction of the Court of Justice of the European Union (CJEU) in respect of trade in goods. We may find ourselves in a situation where CJEU rulings would have to be followed in Northern Ireland but not in GB and all of the complications that could throw up. Also, as the Protocol does not apply to services, CJEU rules on cases relating to services would not necessarily be followed in Northern Ireland unless GB decides to do so but what about cases where there is a mixed supply of goods and services?
While a comprehensive FTA would simplify many aspects of implementing the Protocol in respect of customs and tariffs, the systems and processes needed to operationalise the Protocol will need to be put in place. The recently launched TSS is at least a step in this direction but it all seems very late in the day to get ready in time. All of this is creating significant concerns for business in Northern Ireland. For all our sakes let us hope that the UK and EU can agree a comprehensive FTA and also provide much clearer guidance on the many outstanding issues.
Blog by Frankie Devlin writing as Northern Ireland Protocol Representative on the Chartered Institute of Taxation's Indirect Taxes Committee (Frankie is also Resident Partner at KPMG in Ireland).