VAT changes under the NI protocol

Jan 03, 2021

From 1 January 2021, NI will continue to follow the EU’s VAT rules for goods. However, as the UK-wide VAT rules for services will apply to NI, NI VAT-registered businesses will be required to follow a dual VAT regime from 1 January 2021. This Institute and the NI Tax Committee, chaired by Alan Gourley, have been engaging with HMRC on various Brexit matters, including customs changes and the NI VAT regime throughout the course of 2020 and extensively on VAT in particular in recent months.

The Institute has produced guidance on what the VAT changes will mean for ROI and Northern Ireland, and these guides will be updated as more information becomes known. Read the guides.

Last week the UK government introduced legislation to Parliament (the Taxation (Post transition Period) Bill) which includes how customs, VAT, and excise duty will be dealt with in NI after 31 December 2020, amongst other matters. The current policy paper on the new NI VAT regime for goods is also available, together with related guidance.

In addition to our ongoing discussions with HMRC, the Institute has also raised specific matters of concern in respect of the dual VAT regime with the Department for the Economy, the Irish Government, Revenue and the Directorate General for Taxation and Customs Union.

Key VAT points to note (based on the guidance at the time of writing and our discussions with HMRC) are as follows:

  • Second-hand goods margin scheme

    Although there is scope within the EU to have a national margin scheme, HMRC’s policy paper sets out that this will not be possible for GB-NI movements from 1 January 2021.

    This represents a significant previously unidentified commercial change for many businesses in NI who purchase from GB, notably the second-hand car dealer industry. We understand that HMRC are in ongoing discussions with Government Ministers on this point; however, the current position is that this will need to be raised directly with the European Commission to seek some sort of derogation, which may not be forthcoming.

    HMRC have, however, advised us that the scheme will be available for any goods previously purchased from GB prior to 31 December 2020 and which are still in stock at that time and sold at a later date (as these will previously have been purchased within the EU). We have therefore asked HMRC to update their guidance to reflect this.

  • HMRC’s proposed approach to compliance with the new NI VAT regime

    We have discussed HMRC’s proposed approach to compliance with the new NI VAT regime and what a “soft landing” might look like. It is clear that HMRC are fully aware of the short timescale businesses have to prepare to implement the new VAT regime.  This task is all the more difficult given the multiple changes made to HMRC’s guidance since it was first published in late October.

  • The uncertainty of the VAT changes, coupled with the ongoing pressures businesses are facing due to the COVID-19 pandemic, mean that the normal lead-in time a business has to implement change is simply not available. Therefore, HMRC’s approach to compliance is a critical element in ensuring businesses are not unfairly penalised as a result.
  • Given that many of the changes are in respect of how movements of goods are recorded, processed and reported, transactions will often have no net loss to the Exchequer, meaning the overall risk of any potential lost revenue is minor, which should be helpful as the basis for any potential penalty discussions.

    However, businesses need more certainty and adequate time to amend systems and processes and ensure their staff are adequately trained. Mistakes can and will happen as changes, new rules and processes bed down from 1 January 2021 onwards.

    We have therefore asked HMRC to consider automatic suspension of penalties for a defined period of time (six months) post the end of the EU transition period. This would mean businesses (and their agents) do not incur the cost of appealing against a penalty in that time period. If automatic suspension of penalties is not possible, the alternative is that HMRC should apply their well-established framework for “reasonable excuse”, albeit on a case-by-case basis.

    HMRC’s approach to how the soft-landing will work for NI should therefore be publicised as soon as possible and we intend to continue pressing for a solution that will apply across the board.

  • Goods movements via NI 
  • This issue has the potential to impact detrimentally on the NI economy and arises from the proposed VAT treatment of the movement of goods from the EU (including ROI) via NI to GB (and vice versa).

  • HMRC’s current policy proposals in this area would impose a requirement on the EU business when selling to GB via NI to register for VAT in the UK and/or when purchasing from GB via NI to the EU to reclaim the import VAT paid via a delayed process under the 8th EU VAT Directive (which can take up to three months).

    Both of these proposals, if enacted as currently written, are likely to cause EU businesses to review the efficiency and cost of their current NI-GB-EU/GB-NI-EU supply chain routes and simply divert the goods to GB instead via the Dublin Port which would cut NI businesses (as the intermediary in the supply chain) out of the economic picture.

    We have discussed this issue with HMRC in recent weeks and whilst they have agreed to consider a pragmatic solution, it is not clear that this will be implemented, and a workable commercial alternative established for these supply chains is essential.

  • VAT groups


    HMRC’s policy paper states that UK VAT groups will continue to operate largely as they do now. VAT groups will continue to be able to include members that are established in NI and members in GB. However, there are changes to the way in which a VAT group will operate when they move goods from GB to NI, or where goods in NI are sold between members.

    Usually, supplies of goods between members of a VAT group are disregarded for VAT. However, where goods are supplied by members of a VAT group, and those goods move from GB to NI, VAT will now be due in the same way as when a business moves its own goods .

    Where supplies of goods are made between members of a VAT group, and those goods are located in NI at the time that they are supplied, these will only be disregarded if both members are established, or have a fixed establishment, in NI. Where one or both members only have establishments in Great Britain, the disregard will not apply, and VAT must be accounted for by the representative member. This VAT may be reclaimed subject to the normal rules.

  • XI prefix

HMRC have set out how businesses can check if they are trading under the Protocol and particularly what to do in the context of the XI prefix. HMRC has advised us that businesses which must use an XI prefix when trading with an EU customer or supplier will be able to include both the XI prefix and the GB prefix on their stationery. We have requested that HMRC publicise this widely as soon as possible and we have asked for clarification on a number of related points.

The above issues are just a flavour of the recent discussions held with HMRC in the context of the Protocol and VAT. Members will be updated as matters develop. In the meantime, we recommend you take the time to read the various publications in full and assess the impact on your business/that of your clients but also that you keep up to date with developments in this area in the coming weeks.

More guidance can be found in the UK’s policy paper:

Accounting for VAT on goods moving between Great Britain and Northern Ireland from 1 January 2021.