Brexit and the Northern Ireland Protocol

Introduction

We acknowledge and have heard first-hand from our members of the difficulties businesses in Northern Ireland have had in implementing certain aspects of the regulatory changes (customs procedures in particular) brought about by the Protocol. The publication of the Trade and Cooperation Agreement reached on 24 December just before the end of the Brexit transition period meant that official guidance on many of these changes was finalised and published at a very late stage. This has been a great impediment to the Brexit preparations according to the businesses that we engage with. However, many businesses are beginning to adapt to the new trading environment as they work through the new regulations and the opportunities for Northern Ireland under the Protocol are becoming more apparent.

The Protocol designates Northern Ireland as a uniquely privileged trading zone. Northern Ireland is a member of both the EU customs area and the British customs area. Trade between the EU and Northern Ireland (and Northern Ireland to Great Britain) can continue largely as it did before with no customs duties or paperwork, the advantages of this cannot be underestimated.

The Republic of Ireland (ROI) is Northern Ireland’s single largest export market (excluding Great Britain), and there are no barriers to North/South trade on the island of Ireland. Nor are there barriers for Northern Ireland’s trade with the rest of the EU. In the latest available trade statistics available from NISRA, NI exports to the Rest of EU increased by 21% during 2018 while Northern Ireland sales to Great Britain fell by 9.3%.

The dual status of Northern Ireland in both the UK and EU Single Market for goods gives a unique opportunity to the region in terms of attracting foreign direct investment, particularly in the manufacturing and distribution sectors. Trade lines could be reconfigured to incorporate Northern Ireland as an attractive investment centre. For example, EU businesses wishing to explore opportunities in the UK may choose to set up operations in Northern Ireland, therefore bringing more employment to the region.

As noted, the Protocol does bring challenges to businesses as they adapt to new rules, particularly in the midst of the current Covid-19 pandemic. Our engagement with businesses over the past few weeks in particular has shown that some feel that many of the “unknowns” are becoming “knowns” and things are beginning to settle down as supply chains are reworked and bedded down.

However certain issues remain, and we have highlighted these below.

Lack of practical guidance

The UK Government is continually updating guidance in key areas. As the guidance develops, our recent discussions with your HMRC colleagues have focused on the need for guidance to contain practical examples and case studies as well as step-by-step guidance, where possible. Our members have reported back to us that they are finding difficulty applying customs theory to their practical situation and would like official guidance to include more usable and relatable material. In a survey of our members on 14 January 2021, 67% of our Northern Ireland members said that official guidance on customs and VAT rules has been insufficient to help with the changes Brexit has brought to their business.

The rules that are causing the most uncertainty among our members include:

• The rules of origin
• The grace periods for customs procedures
• How to make supplementary declarations and linkage with the Trader Support Service
• How to determine whether goods should be declared at risk on entering Northern Ireland

Delay in issuing guidance

Many businesses surveyed by the Institute on 14 January 2021 highlighted that guidance, particularly that on East-West Trade was issued too late to enable businesses to adequately prepare.

For example, guidance on the rules of origin was first published on GOV.UK on 1 December 2020, details of the UK Trader Scheme were first published on 15 December 2020 whilst the rules of origin for goods moving between the UK and EU were not published until 29 December 2020. The guidance for sending parcels between Great Britain and Northern Ireland was published on 31 December 2020.

Many Northern Ireland traders have subsequently reported that their counterparts or suppliers in Great Britain were not prepared for the changes in terms of customs paperwork and this has had significant knock-on effects.

Trader Support Service (TSS)

The TSS is welcome and has the potential to be used by many businesses. However, the implementation of the TSS came very late last year and did not give businesses enough time to be educated to use it or reconfigure their systems to be able to provide the data required to use the TSS. Our experience is that system reconfigurations such as these normally take businesses at least 12 months.

Our members have also voiced concerns that the TSS does not provided a bespoke service to any degree and users are required to have all inputted information available to use the service. TSS does not help with non-standard documentation (e.g., SPS documentation). Furthermore, when tracking consignments, the TSS does not list the name of the supplier (it only gives the EORI number) and this makes tracking very cumbersome. Members have reported reduced visibility of their supply chain. Tracking parcels has become very difficult and often the information is either not available or not updated. Users have also reported a desire to have visibility of what the supplementary declarations will entail well in advance of when they are required to be completed.

Suppliers in Great Britain

About one quarter of members surveyed have already or plan to in the future avoid Great Britain as a means of getting goods from the EU into Northern Ireland because of the increased customs administration on goods moving from Great Britain to Northern Ireland. Many report that their Great Britain suppliers are refusing to deliver to Northern Ireland because of the customs formalities. Many Great Britain suppliers supply goods to customers in Northern Ireland under DDP (“Delivery Duty Paid”) terms where they act as the importer and this has implications in terms of cost and responsibility particularly when declaring goods “at risk”. This is discussed in more detail below. Other companies in Northern Ireland have reported that to overcome difficulties with suppliers in Great Britain, they have resorted to agreeing Ex Works terms (i.e., the company in Northern Ireland takes responsibility for import declarations). This increases costs for businesses in Northern Ireland.

Rule of origin

When goods move from the EU to Great Britain and then to Northern Ireland, if the EU exporter can provide a statement of EU origin, preferential origin and therefore no duties apply on the goods moving from the EU to Great Britain. However, under the Trade and Cooperation Agreement, customs duties will arise on the goods entering Northern Ireland because the exporter cannot certify UK origin or EU origin. Our members in business have reported confusion and difficulties arising as given the lateness of agreeing the Trade and Cooperation Agreement and associated guidance, many were left unaware that the rules of origin arise in this instance. This also has the effect of increasing business costs significantly as well as delays in the supply chain.

Goods “at risk”

Businesses have reported concerns about the application of the “at risk” rules particularly in the cases of wholesaler arrangements. For example, a business in Northern Ireland imports goods into Northern Ireland and has customers who are located in both Northern Ireland and Republic of Ireland. For the goods that are going to be ultimately consumed in the Republic of Ireland, appropriate “at risk” declarations are made, and duties paid where applicable. Where goods are sold to a customer in Northern Ireland and this customer subsequently sells the goods to customers in the Republic of Ireland for final consumption, there is confusion among businesses about where the responsibility to declare the goods “at risk” lies. Businesses need clear and timely guidance on this issue.

Reimbursement scheme

As noted above, EU tariffs may apply to goods brought into Northern Ireland from Great Britain if there is a risk that the goods will subsequently be moved to the EU. If it can be proven that goods stay in Northern Ireland, the Joint Committee set up under the Protocol agreed that there would be measures to allow for exemptions, or a potential reimbursement of duties paid. There has been commentary and some guidance on the exemptions but little in the way of guidance on how the reimbursement scheme will work. Businesses have reported in many instances they have to declare the goods at risk (and pay the associated tariffs) at time of import and subsequently the goods are deemed not at risk. These businesses therefore need clarity on how this reimbursement scheme will work as the process of declaring goods at risk and then seeking a refund has in many cases significant cash flow implications.

Furthermore, as noted, many businesses in Northern Ireland agree goods to be delivered under DDP (“Delivered Duty Paid”) terms from suppliers in Great Britain. Therefore, the suppliers in Great Britain may be required to claim back any tariffs paid under the reimbursement scheme. This leads to additional cash flow costs and suppliers in Great Britain may be reluctant to supply to Northern Ireland as a result.

Northern Ireland Group with companies in Northern Ireland and Great Britain

Many group companies have goods that are sent from Northern Ireland to Great Britain for processing in Great Britain. The goods are then returned. Larger businesses have reported that the customs issues are manageable (many have a customs agent) but for VAT purposes the movement of goods from Great Britain to Northern Ireland is chargeable to VAT. The group has a group VAT registration which disregards the Great Britain to Northern Ireland transaction. In this instance, the company has to design a workaround to declare the VAT on their VAT return.

Northern Ireland companies which are part of UK wide Groups or supply chains are also reporting issues with regards to work being moved around the Group because of customs requirements between Great Britain and Northern Ireland. For example, a plant in Northern Ireland (which is part of a UK wide Group) is worried about certain work/projects being reallocated to other plants in the same Group that are located in Great Britain. This is because on movements from Great Britain to Northern Ireland, import declarations are required which place a value on the goods and require an invoice.

The various plants in the Group are cost centres and the value of the finished goods is never recognised in the accounts of records of the various plants. This may cause more work packages to be allocated away from Northern Ireland and undermines the viability of the Northern Ireland operation.

Customs declarations required to return goods from Great Britain to Northern Ireland

Returns coming from Great Britain require a customs declaration. For example, an NI company imports goods from the rest of world, EU and Great Britain. The company then sells mainly to consumers in GB (including a lot of online sales). On balance, about 10% of sales are returned. The company has some sales from Northern Ireland to the Republic of Ireland and therefore cannot declare the goods “not at risk”.

Most benefit from the parcel exemption (£135) for now but some don’t. Companies now have to design a customer portal specifically for returns from Great Britain to Northern Ireland and assume responsibility for the import declarations and transport. This has a significant cost implication for these businesses.

Soft-landing approach to compliance

During our discussions with HMRC’s proposed approach to compliance with the customs and VAT changes, we have explored what a “soft landing” might look like. It is very clear from our discussions that HMRC is fully aware of the short timescale businesses have had to prepare not just in the context of the multiple changes made to guidance and the late laying before Parliament of the associated legislation with implementation expected in a matter of days and weeks thereafter in some cases but also given the late conclusion of the UK’s negotiations with the EU on 24 December.

The COVID-19 pandemic continues to put immense pressure on businesses in meeting their regulatory and reporting obligations due to workplace health and safety responsibilities, the challenges of social distancing and staff resourcing constraints caused by illness, bereavement, and childcare/caring responsibilities.

The regulatory workload of businesses is behind normal schedules due to the national lockdown in 2020 and further restrictions across the various regions introduced from October 2020 onwards. We are also aware of the very considerable demands on our tax authority currently as HMRC channels COVID-19 and EU exit supports to businesses and taxpayers.

In these uncertain times, businesses need certainty of HMRC’s approach to compliance. We are therefore asking HMRC to consider automatic suspension of penalties for at least a six-month period. This would mean businesses (and their agents) would not incur the cost of appealing against a penalty in that period. Handling such appeals adds to the workload and costs for businesses and HMRC alike. HMRC could, of course, seek to act if there is any evidence of deliberate behaviour.

For example, a minimum six-month long grace period for suspension of penalties would match the six-month long deferral period already available for imports entering GB (excluding NI).

Shortage of customs expertise

There remains a shortage of customs intermediaries in the UK market to assist businesses in meeting customs requirements and this also lends to the argument of HMRC taking a soft-landing approach to compliance. As noted already, the Trader Support Service only goes some way to helping businesses as many need specific advice tailored to their own circumstances.

SPS checks

We note that significant challenges remain in terms of SPS checks and Export Health Certificates on goods moving in particular between Great Britain and Northern Ireland. These issues have been highlighted by other bodies and given their specialised nature, we do not propose to add any further comments.

Conclusion

The full consequences of the Protocol are unlikely to be felt until later this year, when the 3- and 6-month grace periods on customs checks may be lifted on goods moving from Great Britain to Northern Ireland. Now is the time to create awareness and educate businesses about the customs compliance that is required when those grace periods end. Otherwise, the confusion seen on 1 January 2021 will be repeated.