Please note this article was completed at the end of August and therefore does not address the publication of the United Kingdom Internal Market Bill on 9 September 2020.

With less than four months to the end of the transition period Brexit is now firmly on the agenda again. Recent months have seen unprecedented challenges due to COVID-19 and Brexit preparations have understandably taken a back seat for many, but the challenges still remain and 1 January 2021 is fast approaching. Now is the time to be prioritising Brexit preparations.

The purpose of this article is not to rehearse the detail of the Protocol on Ireland/Northern Ireland (“the Protocol”) but rather to explore some key areas where the detail is still outstanding and help you manage preparations over the next four months.

It goes without saying that time is short and detail on the practical application of the Protocol is urgently required. We expected to have more detail by this point in the year but this has not been provided. It is important therefore to make the best of what is available, including considering opportunities for your business, which should enable you to react quickly and effectively when the detailed guidance finally arrives.

The key message is to encourage all businesses to understand, prepare and engage.

The Northern Ireland Protocol – Tax

The preamble to the Protocol states, ‘that it is necessary to address the unique circumstances on the island of Ireland through a unique solution’. This is a multifaceted issue, with a complex solution, but one key purpose of the Protocol is to avoid ‘a hard border, including any physical infrastructure or related checks and controls’. However, the simplification of the land border on the island of Ireland leads to complexity for the movement of goods between Northern Ireland and Great Britain and vice versa.

From a tax perspective the Protocol provides that Northern Ireland is to be part of the UK Customs Union but will apply the Union Customs Code in certain circumstances. EU rules in relation to VAT and Excise will apply to goods in Northern Ireland. This unique combination of UK and EU rules applying in Northern Ireland leads to a number of key challenges. Unfortunately, but perhaps not surprisingly, these are the areas where the detail of the practical application of the Protocol remains unknown.

The Protocol established a Joint Committee, jointly chaired by the EU and UK, to facilitate the implementation and application of the Protocol. The Joint Committee has been meeting since 30 March 2020 but we are yet to see any detail on the outcome of its deliberations.

The UK Policy Paper ‘Moving Goods under the Northern Ireland Protocol’, published on 7 August, recognises that some areas do not have ‘complete certainty’ – in our view an understatement – and states that ‘full guidance will be provided by the end of the transition period’. There is no commitment to give time to implement that guidance.

Key Issues

This article focuses further on three key points.

1. Movement of goods from NI to GB – Unfettered Access

Much has been made of the unfettered access provision for NI businesses to the GB market. The UK Government has announced that unfettered access means goods should move ‘on the same basis as now.’ However, unfettered access is only available for Northern Ireland businesses (including businesses headquartered in Great Britain with operations in Northern Ireland). The EU (Withdrawal Agreement) Act 2020 includes provision for the Government to define a qualifying status for goods and businesses in Northern Ireland and the UK Government is engaging with businesses and the Northern Ireland Executive on these definitions.

For NI to GB movements it is largely within the gift of the UK Government to determine what happens on entry to GB. The position on movement out of NI is less clear. The UK’s position is that there should be no export declarations required for goods leaving Northern Ireland for the rest of the UK, which avail of unfettered access, other than in exceptionally limited circumstances. However, the EU has stated that the ‘UK has committed to apply the relevant Union Customs Code formalities in respect of all goods leaving Northern Ireland to either a third country or Great Britain’. Typically, formalities on goods leaving the EU Customs Union would include export or exit declarations.

Ultimately it is for the Joint Committee to agree the position and declarations may be required even for NI businesses availing of ‘unfettered access’.

Having unfettered access will likely be a significant advantage and businesses should be particularly interested in the definitions of qualifying status for goods and businesses in Northern Ireland.

2. Movement of goods from GB to NI – ‘goods at risk’

Whilst for NI to GB movements the UK maintains that the movements should operate ‘on the same basis as now’, the UK accepts that there will be some changes for goods moving into NI from GB, including electronic import declarations, safety and security information and specified processes for food and agricultural products.

Of particular interest is the customs duty impact of these movements. If goods move from GB to NI and remain in NI then they should be considered a movement within the UK customs territory and no duty should apply. However, as there is a risk that goods moving into NI from GB may move into the EU (with no checks to identify a subsequent movement once the goods enter NI) the Protocol provides for customs duty at EU rates to be applied to goods which are deemed to be ‘at risk’ of entering the EU.

The Protocol outlines a very wide definition of goods ‘at risk’, including any goods which will be subject to commercial processing in NI, but the detail of the definition and its application is to be agreed by the Joint Committee.

This introduces significant complexity and impacts many sectors. The agri-food sector will be particularly impacted. The UK Government in its Command Paper of 20 May 2020 states that it considers only goods which are at ‘clear and substantial risk’ of going into the EU should be considered ‘at risk’. The Command Paper specifically cites agri-food processing in NI for return to GB and a supermarket delivering to stores in NI as examples of where the goods should not be considered ‘at risk’.

It is important to note that the issues around ‘at risk’ goods would be minimised by a free trade agreement – in that case an ‘at risk’ determination should not result in a duty cost.

The Protocol provides for the UK to be able to reimburse, waive, or compensate businesses for the duty that will apply. This provides a very broad range of responses available to the UK.

Impacted businesses will be particularly interested in (i) the definition agreed by the Joint Committee and (ii) the actions taken by the UK Government to mitigate any duty impacts.

To help businesses with the new administrative requirements, the UK Government has announced that it will establish a new, free service, the Trader Support Service (“TSS”). Once registered, businesses will provide the TSS with digital information in relation to movements and the new service will deal with all associated requirements for free.

This is an ambitious programme and while the support is to be welcomed there are some concerns as to whether it will be ready in time. The procurement process has just been launched yet the Government announcement states that the system will be available from the end of September. This timeframe is very tight.

3. VAT in NI

The Protocol provides that EU VAT rules should apply to goods in NI. UK VAT rules will continue to apply to services. This position has been described by the EU as a dual VAT system or a mixed VAT system.

The 7 August announcement from the UK Government simply states that further guidance will be set out in due course, noting that changes will be implemented in a way that minimises new costs and burdens on businesses in Northern Ireland.

Meanwhile the EU Commission has proposed changes to the EU VAT Directive to reflect a NI VAT ID with the proposal that this will have the two-letter country prefix ‘XI’.

It remains to be seen whether the UK will try to accommodate this unique VAT system in Northern Ireland through an existing UK VAT registration or if a separate registration and separate VAT returns will be required.

As the changes may require systems updates we recommend you consider how your IT systems could accommodate a separate VAT number for goods in Northern Ireland so that you are ready to effect the necessary changes once the position is made clear.

There are a number of other issues on VAT that you will need to consider, e.g. movements between GB/NI and NI/GB being imports/exports for VAT purposes and the application of postponed accounting for import VAT. VAT will have an increased profile over coming months.

When will the issues be resolved?

We do not currently have a timeframe for when the outstanding issues will be resolved. There is simply a commitment that guidance will be available before the end of the transition period.

Agreement of certain issues at the Joint Committee may be tied to the trade negotiations and therefore clarity may be delayed by the wider process. Unfortunately, we can only say that detail is expected later in the autumn.

What should you do now?

With so much uncertainty, it is often difficult to know where to start. However, businesses should consider the following three actions now:

• Understand

You should understand in detail the potential impact on your business, including refreshing previous Brexit scenario planning. While a number of areas remain uncertain some issues are clear, e.g. the need to make customs declarations for movements from GB to NI.

• Prepare

You should prepare to comply with the new obligations, including applying for an EORI number, if appropriate; deciding how you will make customs declarations; considering the customs classification of your goods; and undertaking preparatory work, e.g. to accommodate a dual VAT system, in your IT systems.

• Engage

If you could be significantly impacted by the areas still to be determined, e.g. at risk goods, you should consider whether to engage with the UK Government and/or the NI Executive to articulate the impact on your business and propose how the issues may be resolved in a way that works best for you.

Is there an opportunity?

While there are undoubtedly a number of challenges facing businesses, it is essential to also explore the potential opportunities that this new context provides.

You may have heard reference to NI having the ‘best of both worlds’ or perhaps the ‘worst of both worlds’. If our work in this area has made anything clear it is that the Protocol does not have a consistent impact on businesses: every business will experience the changes differently.

If your trade is predominantly on the island of Ireland the Protocol will likely be good news relative to the previous proposed solutions, however if your trade is predominantly East-West the Protocol may bring new challenges. How this plays out for you will be unique to your business.

Some of the changes may bring new opportunities, e.g. advanced processing in Northern Ireland, or perhaps ‘standing still’ becomes an opportunity for you, e.g. where the access of a GB competitor to the EU market is hindered while your access remains. Now is the time to consider the opportunities in the midst of all the challenges.

Conclusion

In short, there is a clear gap in detailed information which is creating uncertainty and there is much work to be done over the next four months and beyond. Now is the time for Northern Ireland businesses and those trading with Northern Ireland businesses to understand as far as possible what the Protocol means, prepare to comply with the new administrative requirements and consider the engagement, if any, that you should undertake to try and shape the implementation of the Protocol.

Let’s give the final word to the opportunity. Is there a business opportunity for you? Now is the time to find that out.

David Reaney is VAT Director at EY Belfast

Email: DReaney@uk.ey.com

Rob Heron is Tax Partner at EY Belfast

Email: rheron@uk.ey.com