The Northern Ireland Protocol Bill and VAT

The terms of the UK’s departure from the EU, the “Withdrawal Agreement”, included a Protocol on Ireland/Northern Ireland (“Northern Ireland Protocol”) which set out the unique arrangements agreed to:

  • Protect all terms of the Belfast (Good Friday) Agreement.
  • Avoid a hard border on the island of Ireland.
  • Protect Northern Ireland’s place in the United Kingdom and its internal market.
  • Safeguard the EU’s Single Market.

From a VAT perspective, the Protocol set out that Northern Ireland is subject to the same EU VAT rules on goods as EU Member States but EU VAT rules on services would not apply to Northern Ireland.

According to HMRC’s guidance notes, this meant that:

“Northern Ireland maintains alignment with the EU VAT rules for goods, including on goods moving to, from and within Northern Ireland.

“The VAT rules applicable to movements of goods from Great Britain (England, Scotland and Wales) to the EU, or from the EU to Great Britain will be the same as those currently for transactions with countries outside the EU (with some exceptions).

“VAT will be due on goods that enter Northern Ireland from Great Britain (England, Scotland and Wales). The same will also broadly apply to goods entering Great Britain from Northern Ireland.”

Other rules like the application of VAT rates on goods in Northern Ireland must also be aligned with EU VAT law.

Uncertainties for Businesses

It has been well reported that Northern Ireland should apply EU rules in a variety of areas concerning goods. In practice, however, this led to significant disruptions, uncertainties and burdens for businesses. This has been an area for continuous debate and argument between the UK government and the EU over the past 18 months without much progress.

The UK Government, therefore, introduced the Northern Ireland Protocol Bill on 13th June that, from its point of view “aims to fix parts of the Northern Ireland Protocol, to restore stability and protect the Belfast (Good Friday) Agreement.”

NI Protocol and VAT

The Northern Ireland Protocol Bill has 26 clauses. Clause 17 relates specifically to VAT.

The explanatory notes for the Northern Ireland Protocol Bill, as prepared by the UK Foreign, Commonwealth and Development Office, sets out the terms of Clause 17, as follows:

“Clause 17 provides that the Treasury may make provisions related to VAT and excise law, and any other taxes, which they consider appropriate in connection with the Northern Ireland Protocol.

“This includes, but is not limited to, implementing VAT and excise measures UK-wide that might otherwise not be permitted in Northern Ireland under the Northern Ireland Protocol.

“As such, it provides Ministers with the ability to ensure that VAT, excise, and other tax policies can be applied throughout the entirety of the UK where appropriate, including Northern Ireland.

“93 Subsection (1) provides the Treasury with the power to make provisions about VAT, excise duty and other taxes in relation to the Northern Ireland Protocol. It makes clear that this can include changes that would impose or vary the incidence of VAT, excise duty, and any other tax.

“94 Subsection (2) clarifies that the Treasury may use this power where doing so is necessary to “lessen, eliminate, or avoid differences in VAT, excise duties or other taxes between Northern Ireland and Great Britain.”

Therefore, strictly from a VAT point of view, if the bill is passed, it would give UK ministers power to set VAT rates UK-wide, including transactions in Northern Ireland.

Disregarding the NI Protocol piece by piece

As an example of this solution in action, there was a recent introduction of the zero VAT rate on the installation of energy-saving materials in Great Britain and this was not applied in Northern Ireland as it was not in line with EU law.

The solutions set out in the bill would allow such a change to apply to the whole of the UK.

It is argued that with this Bill, the UK government is effectively giving itself the right to disregard the protocol piece by piece. Naturally, there will be strong objections from the EU and there will continue to be uncertainty for businesses.

UK “acting in a lawful manner”

The proposals of the Bill are still under discussion and the Bill does not yet state an effective date. The UK government has accepted that the bill does not meet its obligations under international law but states that under the “doctrine of necessity” it is still acting in a lawful manner. It is reported that in response the EU may pursue again its infringement procedure against the UK government that was launched in March 2021 but put on hold. EU Ministers have commented that the UK government is “flouting international law” and there “undoubtedly will be consequences”.

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