Last week, the European Commission and UK Government published its draft Withdrawal Agreement on the UK’s withdrawal from the EU. Also published was a seven page political declaration on the UK’s vision of a future EU-UK relationship. Our initial thoughts on what this means for VAT, Customs and Excise duties are set out in this blog although further analysis is needed to do justice to the 585 page withdrawal agreement, plus explanatory notes.
What do we know?
For the time being the uncertainty continues. The Withdrawal Agreement (WA) needs to be approved by Parliament and enacted in law before exit day on the 29 March 2019 if there is to be a transition period. More on what the transition period would mean for indirect taxes below.
For the future relationship, the extent of the changes for VAT, Customs and Excise, depend upon the precise nature of any agreement between the UK and the EU, which is still to be negotiated. The political declaration is, as expected, high level aspiration. Until a firm direction of travel is reached it is difficult to make detailed and reliable analysis.
For VAT, Customs and Excise, there could be little or extensive change. The UK’s inclusion in any Customs arrangement or common VAT area has a significant impact for business and consumers. Government advice in the case of ‘no-deal’ has already been published.
Will there be a transition period?
It depends. Parliament is due to vote soon on whether it accepts the WA. If there is no WA, there is no transition period (unless a new EU/UK agreement on this is made).
The WA provides for a transition period until 31 December 2020, giving businesses some (temporary) certainty. There is the option of extending this transition period once only (to be agreed before July 2020). It is not yet certain for how long the transition period could be extended (the document refers to 31 December 20XX).
During the transition period, EU law for VAT, Customs and Excise would continue to apply in the UK as if it were a Member State. This means that current rules would continue, and EU laws should be interpreted and applied in accordance with the same methods and general principles.
Our assumption, therefore, is that UK businesses should be able to continue using simplification measures such as the VAT mini one stop shop as they do now, as well as using the EU VAT refund system. The VAT number validation system VIES should also continue to apply.
The CJEU would continue to have jurisdiction in any proceedings brought by or against the UK and give preliminary rulings on requests from UK courts / tribunals before the end of the transition period. CJEU judgments would have binding force on the UK until the end of the transition period.
A significant difference is that the UK would no longer participate in the EU institutions and governance structures. During the transition, UK representatives and experts may be invited, exceptionally, to attend meetings and Commission expert groups. This will impact on the UK’s influence on the EU’s Action plan for VAT. Depending upon the length of the transition period, the UK may be required to adopt these changes, including a reduced VAT registration threshold.
There are time limits after the end of the transition period for matters to be brought before the CJEU - administrative cooperation matters relating to indirect tax (four years) and mutual assistance for the recovery of claims (five years).
What has been agreed as the backstop?
The protocol for Northern Ireland/Ireland – the backstop – is designed to come into operation only if the transition period comes to an end without any future agreement. Both the UK and the EU say it is not intended to be used and its aim is to safeguard against a hard border on the island of Ireland.
If there is no future relationship deal and the transition period comes to an end, the protocol comes into effect. It would apply only to goods, not services. There would be a Single Customs Territory between the UK and the EU; where Northern Ireland simultaneously remains in the EU’s Customs Union. Also, many of the Single Market provisions would be in force in Northern Ireland.
We do not know whether those Single Market provisions would require any declarations, presentation of documents or goods or any regulatory checks. The detail is to be worked out by the Withdrawal Committees, subject to a dispute procedure. The aspiration of the WA is for there to be no customs declarations or other formalities between the EU and NI unless strictly necessary.
Certain EU VAT and excise rules would apply in Northern Ireland with respect to the movement of cross-border trade in goods. Northern Ireland would, however, remain part of the UK’s VAT area, with HMRC continuing to be responsible for the operation and collection of VAT, and Parliament for the setting of VAT rates, across the UK. Specifically, the UK says it would 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.
This raises questions about how both the EU and UK VAT regimes will co-exist should the protocol be implemented. Could there be a VAT friction e.g. product checks, customs declarations for VAT and checks to prevent smuggling?
The CJEU would continue to have a role to play in enforcing EU law, with jurisdiction in the UK - with respect to NI - on EU customs law, technical regulations, VAT, excise and state aid. An independent arbitration panel would have powers to refer EU legal matters to the CJEU.
The binding nature of the protocol (if it ever takes effect) purports to keep GB and NI in a particular relationship with the EU without the unilateral right to leave. It is intended to be temporary, but the provisions shall apply 'unless and until they are superseded'.
There are rules concerning cross-border movements of goods that straddle the end of the transition period and the extent to which European Customs, VAT and excise laws apply to them, along with obligations relating to declarations and access to information systems.
Blog by Angela Fearnside, CIOT Technical Officer, Indirect Tax