Legislation to establish the special VAT and customs regime that will apply in Northern Ireland from next month has completed its passage through the UK Parliament ahead of the end of the Brexit Transition Period.
The Bill, now known as the Taxation (Post-transition Period) Act 2020, also:
- Introduces a new system for collecting VAT on cross-border goods, which 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;
- Removes the VAT relief on imported low-value items so that VAT will be due on all consignments, irrespective of their value;
- 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;
- 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.
The Bill was not opposed in either the Commons or the Lords, though Labour did attempt (unsuccessfully) to amend it at report stage to require the Government to publish more information on the timeframe for making Brexit regulations.
Internal Market Bill – a recap and update
The passage of this Bill followed that of the UK Internal Market Bill which concluded its parliamentary passage on 16 December and gained Royal Assent the following day. This Bill, now an Act, contains legislation required to ensure the UK internal market continues to function smoothly outside the EU. For example, it includes provision for market access principles of mutual recognition and non-discrimination for goods and services.
The Bill also seeks to ensure unfettered access for qualifying Northern Ireland goods to the rest of the UK market. To do this, clauses in the original Bill sought to give ministers the power to unilaterally interpret, modify the application of or disapply parts of the Northern Ireland Protocol, notwithstanding their obligations under relevant international and domestic law. These provisions were controversial, were removed by the House of Lords, and the Government agreed to withdraw the offending clauses following talks in Brussels between Cabinet Office Minister Michael Gove and EU commissioner Maroš Šefčovič.
Another controversial aspect of the Bill was that it set out to deliver market access principles that overrode the freedom of devolved governments to develop their own approaches in non-reserved areas. Critics pointed out that the Bill ignored the common frameworks established as the method of managing diversity between the UK’s nations in a consensual way. Following another set of amendments in the Lords, the devolved authorities now have a role in developing market principles and the common frameworks are written into the Bill. However devolved administrations remain unhappy with the Bill, with SNP spokesperson at Westminster Drew Hendry calling it “the biggest assault on devolution in the history of the Scottish Parliament. It undermines devolved policy making, grabs spending powers, and removes state aid from being a devolved responsibility.” The Welsh Government have announced that they intend taking the UK Government to court over the provisions in the Bill.
Lib Dem Business Spokesperson Lord Fox commented: “[W]e would not have taken this direction but after three rounds of ping pong the bill leaves the House of Lords much improved. At the outset we identified three areas of concern: its illegality, its challenge to the devolution settlement and its future governance. All three areas have been addressed during the dozens of hours of debate and many votes.” ‘Future governance’ refers to the establishment under the Bill of an Office for the Internal Market (OIM) to monitor the effectiveness of market principles, to which some safeguards were added during the Bill’s passage.
Taxation (Post-transition Period) Bill - House of Commons report stage – Tuesday 15 December
Notwithstanding the dropping of the so-called ‘notwithstanding clauses’ in the Internal Market Bill (see above), Conservative eurosceptic MP Sir William Cash sought to add similar clauses to the Taxation (Post-transition Period) Bill during its report stage. New clauses 1 and 2, if adopted, would have meant that the provisions in the Bill would apply notwithstanding any domestic or international law. Cash said his clauses related to what was originally in the Internal Market Bill, and ‘they were there for a very good reason’.
Cash argued that such provisions were not unusual, claiming that Finance Act 2013, under the coalition, allowed Parliament to effectively write a blank cheque to interfere with approximately 130 international treaties. That provision is still in force, he said. No one questioned the Chancellor’s right to introduce such legislation or, indeed, the lawfulness of the work of HMRC, which still relies on it in combating questions relating to such arrangements, said Sir William. He went on to give the example of Section 52 of the Finance (No. 2) Act 1945 that overrode aspects of the Ireland-UK tax treaty of 1926 and the Finance Act 1955 again overrode the Ireland-UK tax treaty. He claimed every one of the bailouts from 2010 to 2015 could justifiably be described as in breach of article 125 of the Treaty on the Functioning of the European Union.
Cash did not push his two new clauses to a vote
Commenting on Cash’s suggested new clauses, Shadow Treasury Minister Pat McFadden (Labour) said: “’Notwithstanding’ cannot be a get-out-of-jail card for the country to escape its obligations. We would never get away with that in everyday life. Let us imagine telling a police officer, ‘Notwithstanding the law on theft, I thought I’d just take the goods out of the shop without paying for them’.”
McFadden said Labour supports the Bill, despite some concerns about It, because it offers a little more certainty for people and businesses.
McFadden spoke for Labour’s new clause three. Labour wants the Treasury to publish a report setting out the timeframe within which it will use the powers to make regulations conferred by the Taxation (Cross Border Trade) Act 2018. McFadden complained that the Government is asking businesses to absorb, prepare for and comply with a new series of taxation regulations that those businesses have not yet seen, and to do so over a two-week period coinciding with Christmas. And they are doing that at the end of a year in which the very same businesses have already faced unprecedented turbulence in the wake of a global pandemic. Even if Labour’s new clause was accepted, the MP said it would still be difficult for businesses to understand it all before the new year. This is not just drafting understood changes to an already understood system, as happens in much of the measures in Finance Bills, he said.
Sir John Redwood, Conservative, spoke in support of Cash’s amendment, saying ‘a proper Brexit is taking back control; it is recreating the sovereignty of the people of the UK through their Parliament’. The EU system is to try to use tariffs to buttress domestic production, but it has not worked for the UK, he said. The Bill could be improved by reminding the EU that we will not be pushed around and we will not suffer too much bad faith from those original negotiations or from the withdrawal agreement itself, he added.
Andrew Jones, Conservative, said Cash’s new clauses would not be viewed as an enormously helpful measure by those negotiating a deal. Jones went on to say the point in the Bill about creating a more level playing field between the online and the high street worlds of retail is something that MPs should all be able to support easily. “Obviously the clock cannot be turned back in any way—this is about embracing the future—but we must make sure that as retailers evolve the offer of our high streets, they are able to do so with a more level playing field.”
Kevin Hollinrake, Conservative, spoke against Cash’s clauses, saying all international trade agreements need an independent body to decide who is breaching the agreement. If Parliament is simply sovereign and is able to say, ‘In our judgment, you are breaking the agreement’, all trade agreements would fall apart.
Commenting on her dislike of Cash’s clauses, the SNP’s Alison Thewliss said the Government should have no business in breaching international law, particularly when that undermines their reputation in the negotiations. But Thewliss supported the Labour clauses, saying anything that helps to hold the Government to account on the new powers that they are appropriating for themselves is welcome.
Thewliss complained that MPs still do not understand the real definition of ‘at risk’ goods or indeed how they are going to be monitored. There is still uncertainty about EU product standards on industrial goods and how that applies in Northern Ireland, and there are also still issues around movement of goods cargos from GB to Ireland via Northern Ireland. She went on to say that it is deeply worrying that some ports that have asked for money for their infrastructure have got nothing and others have not got all they need.
Her colleague in the SNP Treasury Team, Stephen Flynn, said the level playing field that the Government are putting in place for online sales should also apply to Scotland to help its ability to access EU markets.
Wendy Chamberlain, Lib Dem, said the Bill speaks to the heart of the many contradictions of Brexit. A case in point is clause 6 of this Bill on the uprating of fuel duty for aviation gasoline, which, she said, is a microcosm of the whole Brexit process. “The whole point of Brexit was to get our sovereignty back—was it not?—so that we could finally write our own laws rather than follow bureaucratic regulations from Brussels, the sort of stiflingly dull directives with boring names such as EU energy tax directive (Council Directive 2003/96/EC). We might have thought that directive was exactly the sort of red tape we would finally cut through in Brexit Britain, and yet the Bill proves that the reality is far removed from the rhetoric, because EU energy tax directive (Council Directive 2003/96/EC), which ensures that across the EU a minimum level of tax is applied on a whole type of aircraft fuel, is in this Bill being applied across the whole of the UK.”
She dismissed Cash’s clauses as unhelpful but backed the Labour suggestions, saying economic assessments have been conspicuously lacking over the past few months.
Labour’s Matt Western spoke about UK sovereignty and said the quid pro quo is about access to markets and obligations. He likened it to how businesses have to work. If they want to be in the app market and use the Apple platform, they have to pay to be part of that. If Honda is not able to get parts from its supply chain here to the UK, what hope is there for small and medium-sized businesses across the UK? Whether they are a clothes retailer or a car manufacturer, they just want clarity and certainty, he said. “They want an uninterrupted supply of goods into the first quarter of next year. Given the damage already done by the pandemic, we cannot afford further economic disruption,” he added.
Responding to Cash, Tax Minister Jesse Norman said the notwithstanding clauses were previously introduced as reasonable steps to create a safety net so that the Government would always be able to discharge their commitments to the people of Northern Ireland in the event that a negotiated outcome could not be reached in the Joint Committee. Following intensive and constructive work over the past weeks by the UK and the EU, the Government have now reached an agreement in principle on all issues in relation to the protocol on Ireland and Northern Ireland. This is an agreement that discharges the Government’s commitment to the people of Northern Ireland to ensure that there are no tariffs on goods remaining within the UK customs territory. As part of the agreement, the Government committed to removing the notwithstanding provisions in the United Kingdom Internal Market Bill and not to introduce them or any similar provisions in this Bill.
On Labour’s amendments, Norman said details of any policies along these lines would be announced in due course, and HMRC will publish detailed guidance providing certainty to traders and businesses, as is its normal procedure.
In other comments, he said HMRC expects there to be up to 11 million declarations in relation to trade between Great Britain and Northern Ireland, and the Customs Declaration Service, which has been put in place, has a minimum viable product up and running.
Labour pushed its new clause 3 to a vote but lost 263:364. Cash did not push his clauses to a vote.
Taxation (Post-transition Period) Bill - House of Commons third reading debate – Tuesday 15 December
Opening the Bill’s third reading debate, Financial Secretary to the Treasury Jesse Norman said that, in just over two weeks’ time, the transition period would end. “The UK and its tax system must be ready to support the smooth continuation of business across this country. In that regard, the Bill is a cornerstone of those preparations. In addition, it will play an important part in helping to implement the Northern Ireland protocol and to safeguard the Belfast/Good Friday agreement.”
The minister assured the House that HMRC will remain the tax authority for the whole of the UK, and that businesses will continue to submit only one UK VAT return to account for VAT on all supplies of goods and services. While the Bill amended current legislation for excise duty to be charged when excise goods are removed to Northern Ireland from Great Britain, that would not mean additional costs for Northern Ireland businesses and consumers, because the Government will be introducing a mechanism to offset any excise duty already paid on those goods in Great Britain.
For Labour Pat McFadden repeated that his party understood these changes needed to be put in place. But, he said, “We are asking a lot of businesses with just a couple of weeks of the year left, in the midst of the pandemic and as we are about to enter the Christmas holiday period.”
For the SNP, Alison Thewliss said Northern Ireland was “being wound up in a giant Christmas ball of red tape as a result of the legislation”, citing 11 million extra declarations and paperwork, “more than 265 additional bits of form-filling that will happen after Brexit”. “We still do not know whether the transition period is ending, and with 16 days to go we still do not know what we are going to transition to,” she complained. “This Government have made an absolute mess of the four and a half years that they have had.”
Sir John Redwood (Conservative) lamented that the Bill is a great missed opportunity. It should have been the Bill in which we started to cut and reorganise the taxes, celebrating our new freedoms as we leave the European Union, he said. There is so much good we could do by remodelling and reducing the incidence of VAT, for example, or by having excise duties and tariffs that make sense for British business and for British importers, because we need to balance the two, he said; instead, he claimed, ‘it is a rather technical Bill’. He added: “We must have control of taxation and state aids as a fundamental part of our Brexit departure.”
Wendy Chamberlain, for the Lib Dems, said that, despite covid, the Government had had a lot of time to bring forward the necessary legislation ahead of the transition period, whether there was a deal or not. “If they felt that the challenge of covid this year was too great, they could have averted the current covid-Brexit collision by extending the transition period. I would ask when the Government realised that the measures in this Bill and, indeed, this week’s Trade (Disclosure of Information) Bill were needed. I worry what potential measures the Government may have failed to legislate for, and the extent to which we are prepared for the end of the transition period, deal or no deal.”
The Bill was granted a third reading without a vote.
Read the session here.
Taxation (Post-transition Period) Bill - House of Lords all stages – Wednesday 16 December
Opening second reading debate on the Bill, Treasury Minister Lord Agnew outlined the contents of the Bill. He explained that for goods deemed to be ‘at risk’ of moving into the EU, the Bill introduces a framework for charges on goods arriving in Northern Ireland, both from GB and from the rest of the world. It also imposes a charge to UK customs duty on goods that enter GB from Northern Ireland and are not qualifying Northern Ireland goods.
Lord Agnew explained that the Bill introduces a new system for collecting VAT on cross-border goods. “This includes moving VAT collection on certain imported goods away from the border and involving operators of online marketplaces at the point of sale. UK consumers will now be able to see a VAT-inclusive price at the point of purchase, making pricing more transparent. In addition, measures in the Bill will remove the VAT relief on imported low-value items, meaning that VAT will be due on all consignments, irrespective of their value. This relief has been subject to long-standing abuse and removing it will build on government efforts to further level the playing field for UK businesses by protecting our high streets from VAT-free imports.”
Labour spokesperson Lord Hain said the Bill “reflects a chaotic last-minute scramble by the Government to retreat from their outrageous proposal to break international law in relation to the Northern Ireland protocol of the European Union withdrawal agreement”. He noted that the Bill reflected the decisions of the joint UK/EU committee set up under that agreement on goods entering Northern Ireland “not at risk” of entering the EU, thereby ensuring they do not have to pay the EU tariff. This was, he said, good news for businesses trading across the Irish Sea, as it is estimated that 98 per cent of goods going from GB to Northern Ireland will now be able to do so free from tariffs, irrespective of whether there is a UK-EU trade deal. But he remains concerned about the imminence of the end of the transition period and the potential for disruption, especially to agri-food products.
Baroness Kramer, speaking for the Lib Dems, bemoaned that the Government were seeking to diminish Parliament’s role by doing so much through negative statutory instruments in this Bill. Kramer sits on the EU Goods Sub-Committee, where ‘small businesses have told us that the trusted trader scheme is simply not fit for purpose. It is complicated, expensive and disproportionate. It must be reformed’. She called for a six-month adjustment period for all goods and small businesses that form our trade with the EU. On VAT, she said business will be taking a real risk if it does not get expert advice to be able to cope, and that will be really challenging, especially for smaller and medium-sized businesses. She remarked that VAT experts had been given ‘job security for life’ with the complexities that will arise.
Baroness Altmann, Conservative, congratulated the Government on attempting to reinforce the powers to tackle tax evasion and on seeking to minimise the changes involved. She noted a study that found that the abolition of tax-free shopping for overseas visitors would hit cities in Scotland and northern England, not just London and the south-east of England. “[T]he Centre for Economics and Business Research estimated that this change in VAT… could lead to 138,000 job losses and a potential loss of revenue to the Treasury of £3.5 billion, rather than a net saving,” said Altmann, saying she had struggled to find support for the removal of this VAT relief in any quarter.
Lib Dem Lord Bruce of Bennachie observed that, “Facing reality, the Government have now agreed, as they always had to, that at-risk goods will be properly monitored, that Northern Ireland will conform to EU rules on, as a case of detail, aviation fuel duty, and that the rest of the UK will follow suit for “consistency”. Is this a taste of things to come? I suspect it is. Similarly, there is agreement on aspects of VAT, but can the Minister explain the implications for online sales under £15 in Northern Ireland? Do Northern Ireland residents have to pay VAT on online purchases when GB residents do not?” On trading under WTO rules he warned that the WTO is a ‘pretty dysfunctional organisation’ in dealing with disputes among its members.
Baroness Pidding, Conservative, said the Bill provides legal certainty for the customs, VAT and excise systems in Northern Ireland after the end of the transition period. “This legislation will also help deliver the commitment made by this Government to deliver unfettered access for Northern Ireland businesses to the rest of the UK internal market and protect progress made under the Belfast agreement”, she added.
Baroness Ritchie of Downpatrick, a non-affiliated peer, highlighted that the decision on the continued application of the protocol arrangements on traded goods in Northern Ireland will be for the Northern Ireland Assembly to take on a cross-community basis every four years. She wants more details set out on how duties and tariffs might be rebated through regulations under the Bill.
Lib Dem Baroness Suttie complained that with just two weeks to go before the end of the transition period, peers are debating a long and complex Bill without clarity on either the context or much of the content. Northern Ireland trade groups warned that, in spite of the £200 million trader support service, businesses would not be ready to deal with the new border processes, computer systems and bureaucracy in time for 1 January 2021, she noted. It also remains unclear how non-qualifying goods will be determined and how they will be distinguished as they move from Northern Ireland to Great Britain, she said.
Baroness McIntosh of Pickering, Conservative, requested that a period of grace of between two and six months, to ensure that those keen to abide by the rules, which are not yet clear, will have the time to make themselves familiar with them. She also asked the minister to confirm the status of the UK global tariff regime for imports.
Baroness Bennett of Manor Castle, Green Party, welcomed the ‘modest’ measures in the Bill against tax dodging. She said she was happy to see the increase in aviation and gasoline tax, though it is ‘nowhere near enough’. More generally she asked how those suffering and struggling to cope through the pandemic would benefit from Brexit: “We know that the surfers of disaster capitalism, the hedge fund traders and the purveyors of fancy financial instruments will benefit from the chaos—they always do. A few people will profit and the rest of us will pay.”
Lord Bhatia, non-affiliated, said the Government should not forget that the UK has signed an international agreement on Northern Ireland, which is part of the UK. Any breach of this agreement would damage the UK’s reputation internationally. It would also lead to the break-up of the UK, he thought.
Beginning the wind-up speeches at the close of the debate, Lord Fox, Lib Dem Business Spokesperson, sighed that this Bill is essentially content free, with the real detail coming with the regulation and the secondary legislation. He said people saw adverts on television every night telling them to get ready, but what are they getting ready for? “What goods will be non-qualifying, and when will people know? That is really important and, again, it begs the question about delaying implementation so that people really can get ready, because that is what they want to do.” Fox also asked whether the rules around duty suspension would be changing, what the expected tax take was from scrapping low value consignment relief, and for the Government to publish its cost-benefit analysis (he was sure they must have produced one) for removing tax-free shopping for foreign visitors.
Far from providing the certainty that businesses and consumers need, this is yet another framework Bill that leaves much of the detail for later, complained Lord Tunnicliffe, Labour’s spokesperson. Labour support the timely passage of the Bill, as it is important to minimise any disruption, he explained, but that does not mean that they endorse the Government’s approach to the negotiations on our future relationship with the EU. He had a particular concern about the lack of detail on customs agents and intermediaries - especially how to get to 50,000 of them when they are industry recruits not civil servants.
Concluding the debate, Cabinet Office Minister Lord Agnew responded to the contributions from peers.
He explained that the Government have outlined in their Command Paper that there are no plans for any new bespoke customs infrastructure in Northern Ireland or at ports in GB to implement the protocol.
He told Baroness Kramer that businesses will continue to use their current VAT number, HMRC will continue to administer the VAT system for the whole of the UK, and businesses will continue to complete their single VAT return and account for VAT in the same way as they do today, including where they sell goods between GB and NI.
Businesses selling goods to a GB or NI customer will see little if any difference in accounting for their VAT, he claimed. And low-value consignment relief, the important VAT relief for goods valued at £15 or less, will be removed in both GB and Northern Ireland.
Lord Agnew also explained that authorised traders, such as supermarkets and their trusted suppliers, will benefit from a grace period through to 1 April 2021 from official certification for products of animal origin, composite products, food and feed of non-animal origin and plants and plant products.
On enforcement and anti-avoidance between NI and GB, HMRC will enforce these provisions through risk-based checks and random spot checks, said the minister. HMRC will also conduct behind-the-border intelligence-led investigations, focusing in particular on high-risk traders and high-risk commodities. Wrongly claiming goods status is a form of tax evasion which HMRC will treat as seriously as any other, he warned.
The software system for the Customs Declaration Service (CDS) is live and can accept all import and export declaration types, he claimed. Its minimal viable product has been successfully delivered, all critical core functionality is embedded and it is fully compliant with the union customs code legislation. The CDS has been scaled to be able to process Northern Irish protocol declarations, including GB traders, to move across.
He told Lady Suttie that the current definition for Northern Ireland qualifying goods is expansive and includes any goods in free circulation in Northern Ireland. In the long term, the Government’s priority is to focus the benefits of unfettered access on Northern Irish businesses. Therefore, the Government will lay a new definition of Northern Ireland qualifying goods that includes only goods moved by businesses established in Northern Ireland. In the long term, additional protections will be in place for Northern Irish agricultural goods.
The UK global tariff will replace the EU’s common external tariff as the UK’s most favoured nation tariff from 1 January 2021. It is simpler to use, greener and cuts red tape and other unnecessary barriers to trade, he claimed.
Responding to Lord Fox’s question about the rules on duty suspension, Lord Agnew said the Government “have kept the rules in relation to the movement of excise goods and duty suspension between GB and NI as close as they are now, to reduce the burden on excise businesses and maintain the important controls that we have in place to prevent excise fraud.”
About 20,000 traders have registered with trader support service (TSS), with half NI-based and half GB-based, which is close to the Government’s estimate of 12,000 NI businesses needing this service. About 250 people are working on the TSS call centre and Lord Agnew is confident that it will be at the 700-people target ‘rapidly’.
HMRC will be taking a supportive approach and will not charge a penalty if a business has taken reasonable care to get its tax right, he promised.
He told Baroness Altmann that fewer than one in 10 non-EU visitors to the UK use VAT RES, and it is not a policy for discussion in this debate. The rules on VAT RES are not contained in the Bill, he said. However the OBR, the fiscal watchdog that reports to Parliament, has published an independent and up-to-date assessment of the measure’s fiscal effects, “which confirms the Government’s conclusion that withdrawal of VAT relief will raise a significant amount of revenue for the Exchequer, with a limited behavioural response and negligible impact on visitor numbers.”
Expanding on this he said that the OBR has forecast “that these changes will raise over £300 million a year over the next five years—that is £1.6 billion over the scorecard period. Approximately two-thirds will come from improving collection and tackling non-compliance through the new VAT treatment of cross-border goods. The final third of the revenue comes from the removal of low-value consignment relief, which will end widespread abuse of this relief.”
Responding to questions from Lord Tunnicliffe on the timing and sequencing of forthcoming regulations, the minister said that the EU-UK joint statement made the previous week set out that an agreement has been reached in principle regarding the implementation of the Northern Ireland protocol. “As part of that statement, this agreement is in principle, and the resulting draft texts will be subject to respective internal procedures in the EU and the UK. Once this is complete, a joint committee will be convened formally to adopt them. Further details, including regulations, will be set out in due course, before the end of the transition period.” Excise statutory instruments covering Northern Ireland will be laid in Parliament as soon as possible, coming into force from 11 pm on 31 December, and any new excise change that arises as a result of the excise clauses in this Bill will apply from that point onwards.
Lord Tunnicliffe had also asked about forbearance. Lord Agnew replied that: “On customs, we recognise that mistakes happen, even when a business has taken care to meet its obligations, particularly in a new environment. HMRC will be taking a supportive approach and will not charge a penalty if a business has taken reasonable care to get its tax right. Where honest mistakes happen, HMRC will be stepping in to help customers put things right, but taking tougher action on deliberate, fraudulent behaviour. Financial penalties will generally be reserved for those who are able to comply but deliberately choose not to.” HMRC will take a similar approach on excise, the minister added.
Like Finance Bills, this Bill was designated a Money Bill, so by convention was not opposed or amended in the Lords. It gained a second reading unopposed, there was no committee or report stage, and it gained a third reading without debate or opposition. The Bill gained Royal Assent the next day.
The full session can be read here.