This Insight is designed to give an overview of a highly complex and wide-ranging subject and does not attempt to provide a comprehensive guide.
The Northern Ireland Protocol to the EU–UK Withdrawal Agreement applies EU law “to and in the UK in respect of Northern Ireland” in respect of certain specified value-added tax (VAT) provisions concerning goods, but not services. Although businesses trading under the Protocol remit their VAT to the U.K. tax authority, HM Revenue & Customs (HMRC), EU VAT rules, rather than U.K. VAT rules, apply to supplies of goods in relation to Northern Ireland (NI).
In effect, so far as VAT on goods is concerned, HMRC must operate as if part of the U.K. remains within the EU. As a result, movements of goods from NI to Great Britain (GB) (that is, England, Scotland and Wales) must be regarded as if they were imports from the EU, and movements in the other direction should be seen as exports to the EU.
The specific EU VAT provisions include:
- Directive 2006/112/EC, the principal EU VAT Directive (PVD);
- the Directive governing refunds to EU VAT-registered businesses of VAT incurred in other member states;
- the 13th Directive, which enables businesses in third countries to obtain refunds of EU VAT;
- provisions relating to administrative co-operation in relation to fraud and mutual assistance.
The last point above may make it easier for EU tax authorities to seek information from HMRC about NI VAT-registered businesses and even, where appropriate, to continue to make visits to those businesses. HMRC is relying very heavily on Articles 201 and 211 of the PVD which give member states considerable discretion on how they administer the collection of import VAT.
Which Businesses Fall Under the Protocol?
The Protocol applies to any VAT-registered business that either:
- sells goods that are located in NI at the time of their sale; or
- receives goods in NI from VAT registered EU businesses for business purposes; or
- sells or moves goods from NI to an EU member state.
Whenever quoting their VAT number to an EU supplier, a business covered by the Protocol should add the prefix “XI.”
For economy of expression, we are going to refer in the rest of this Insight to businesses covered by the Protocol as “NI businesses,” although not all NI businesses will be affected and not all businesses affected by the Protocol will be based in NI.
Opportunities for Businesses
Opportunity 1: Distance selling
“Distance selling” refers to the business model where the supplier sells goods online or by mail order to non-VAT-registered customers in other EU member states and arranges the transport of those goods. The following outline of the EU VAT distance selling rules does not apply to sales of excise goods or new means of transport, as defined by the PVD.
Where NI businesses make distance sales, they can continue to use the current EU distance selling arrangements. This means that they do not have to account for import VAT and register for VAT in each EU country where they make distance sales, as is the case for other U.K. distance sellers. Instead, they can charge U.K. VAT up to the point that they exceed the distance selling threshold in any given EU member state. Once they exceed that limit, they must register for VAT in that country. They also have the option to register earlier.
Conversely, EU businesses can continue to use these arrangements for distance sales to NI resident customers.
From July 1, 2021 these arrangements are replaced by the Union One Stop Shop (OSS). Under the Union OSS, EU businesses that make distance sales will be able to account for VAT at the rate in each EU country where they have non-VAT-registered customers through a single registration in their own country. NI distance sellers will also be able to use the Union OSS, administered, as it will be, solely for NI by HMRC.
Opportunity 2: Simplification for triangular transactions
Almost from the outset of the Single Market the EU introduced VAT “simplifications” designed to make that market operate more smoothly. One of the best known is the simplification for triangulation.
“Triangulation” refers to the situation where, for example, a business (A) in one member state (say, France) fulfils an order from a customer (B) in another member state (say, Germany) using a supplier (C) in a third member state (say, Spain). The Spanish supplier will invoice the French supplier, who will in turn invoice the German customer, but the goods will go straight from Spain to Germany. The triangulation simplification is designed to save the intermediate supplier (in this case, the French supplier) from having to register in the country to which the goods are sent (in this case, Germany).
If A were a GB business, the triangulation simplification could not apply as GB is no longer in the EU. The GB supplier would have to register for VAT in Germany, unless the German customer was prepared to act as importer of record. By contrast, if A were an NI business, then triangulation could apply.
Opportunity 3: Simplification for chain transactions
The EU has a further simplification that can be used in transactions where there are three or more businesses involved in a cross-border transaction and the invoice trail and the movement of the goods do not coincide. This was one of the “four quick fixes” agreed by the EU with effect from January 1, 2020. This too would be available where an NI business was part of a chain transaction.
Opportunity 4: Simplification for call-off stock
Prior to January 1, 2020, where a business in one EU member state moved stock to a warehouse in another member state for “call-off” by a specific customer, the VAT rules in some countries meant that the supplier in these circumstances had to register and charge VAT in the country where the call-off stock was located. One of the four quick fixes put this right by deferring the time of supply to the point that the customer calls off the stock. If it meets the conditions laid down in the four quick fixes, the supplier does not have to register for VAT in the country where the call-off stock is kept, and the customer accounts for the acquisition VAT in that country. This solution continues to be available to both of the following:
- EU suppliers holding call-off stock in a warehouse in NI. If they do not meet the conditions specified in the quick fix, then they have to register for U.K. VAT; and
- NI businesses that move goods to hold as call-off stock in an EU member state.
The quick fix is not available to a GB business holding call-off stock in an EU country; VAT registration would be necessary in that EU country. Conversely an EU business holding call-off stock in GB would have no option but to register for U.K. VAT.
Opportunity 5: Selling goods from GB to an EU member state via NI where the goods are in NI at the time of supply
Where a GB business moves goods into NI before allocating them to a supply—for example, a GB seller sends goods to a warehouse in NI then agrees their sale—there are two transactions for VAT purposes:
- a movement of own goods from GB to NI, to be dealt with as in Pitfall 1 (see below); and
- an intra-EU supply to the (probably Irish) EU business customer.
This again suggests that there may be an opportunity now for those running warehouses in NI to expand their businesses.
This contrasts with the situation where the goods are allocated to a supply before they are moved from GB to NI in transit to an EU member state (see Pitfall 2 below).
Opportunity 6: EU VAT refunds
Where a business has an establishment in NI and either makes supplies of goods in or from NI or makes intra-EU acquisitions, it can continue to use the HMRC portal to recover VAT incurred in an EU member state on goods. For example, a Belfast manufacturer would still be able to reclaim Irish VAT incurred on purchasing fuel when attending a trade fair in Dublin and would do so via the HMRC portal. By contrast, a GB manufacturer incurring the same expense would have to apply for a refund from the Irish Revenue using the 13th Directive procedure.
Pitfall 1: Moving own goods from GB to NI
Where a U.K. VAT-registered business moves its own goods from GB to NI it is regarded as importing those goods into the EU. As a result, it has to account for “import” VAT on the value of those goods through its own VAT return. So long as it intends to use the goods for taxable business purposes it can claim this VAT as input tax in the same return.
By contrast, a NI business does not need to account for VAT where it simply moves its own goods from NI to GB.
Pitfall 2: Selling goods from GB to an EU member state via NI where the goods are in GB at the time of the supply
If goods are in GB at the time that they are sold to a business in an EU member state, and the goods are to be moved to the EU customer via NI, the supply attracts import VAT in the EU, which the GB supplier must account for as output tax in its U.K. VAT return. This import VAT can be recovered by the EU buyer either:
- through their U.K. VAT return if they are registered for U.K. VAT; or
- through the EU VAT refund scheme if they are not so registered.
This is in contrast to a transit movement in the opposite direction—see Opportunity 5 above.
Pitfall 3: Moving goods from an EU member state to GB via NI
Where this happens, the seller must register for U.K. VAT and account for the import VAT on a U.K. VAT return. The U.K. customer will be able to claim this VAT as input tax provided it is incurred for the purposes of making taxable business supplies.
Pitfall 4: Group VAT registrations
Supplies between members of a U.K. group VAT registration are normally disregarded for VAT purposes. The supplier does not charge VAT and the buyer has nothing to claim. However, the Protocol creates some exceptions:
- an intra-group supply of goods moved from GB to NI will be treated in the same way as a movement of own goods from GB to NI;
- intra-group supplies of goods located in NI at the time of supply will not be disregarded unless both members are established, or have a fixed establishment, in NI. Where one or both members only have an establishment in GB, the supply will be treated in the same way as a movement of own goods.
In both situations where the supply is not disregarded, the group registration must account for output tax but can claim the VAT as input tax in the same VAT return, provided there is an intention to use the goods to make taxable business supplies.
Pitfall 5: VAT numbers
NI businesses supplying goods to EU VAT-registered businesses must continue to obtain their customers’ VAT numbers. This has been an obligatory step for EU businesses since January 1, 2020 and the introduction of the four quick fixes.
Pitfall 6: Evidence of export
This is a particularly nasty pothole. Since the introduction of the four quick fixes with effect from January 1, 2020, the EU rules for providing evidence that goods have been removed from one member state to another became much more uniform and specific. These rules apply to supplies by NI businesses to VAT-registered businesses in any EU member state.
The regime for proof of export from the U.K. to the rest of the world (RoW) is not the same—see HMRC Notice 703 at section 6. NI businesses will need to be aware of these differences if they export both to the EU and the RoW. GB businesses only need to comply with the set of rules in Notice 703.
Pitfall 7: Margin schemes
The PVD requires member states to apply a margin scheme to calculate the VAT on sales of second-hand goods, works of art, antiques, and collectors’ items. Where a margin scheme applies, the dealer accounts for VAT on the gross margin rather than the sale price. For example, a car dealer buys a vehicle from a private individual for 4,800 pounds and sells it on for 6,000 pounds. Instead of accounting for VAT on 6,000 pounds x 20% = 1,200 pounds, the dealer accounts for VAT as if the margin of 1,200 pounds includes VAT of 200 pounds.
Initially it appeared that the Protocol would make the NI second-hand car sector wholly unviable. This is because the PVD specifies that the margin scheme can only apply to sales of eligible goods supplied to dealers from within the EU, whereas most NI car dealers source much of their stock from GB.
Intense political pressure led to the U.K. government announcing that the margin scheme would, after all, apply to second-hand cars bought in GB and then sold in NI. There would be import VAT on the movement by the dealer of the car to NI, but that could be recovered by the dealer. However, it is understood that the U.K. government has had to apply to the EU for a derogation from the rules in the PVD, and the result of that application is still awaited.
Meantime, the margin scheme remains unavailable to NI dealers on the sale of other goods that would otherwise be eligible but are sourced from GB, unless the goods have been brought into NI by a private individual.
Pitfall 8: Reporting obligations
Some of these have altered in ways that are not immediately obvious or intuitive, as explained below.
Intrastat: Intrastat is what the U.K. calls the EU system for collecting statistics on physical movements of goods between member states. EU businesses are required to complete Intrastat returns once the value of the goods they move exceeds certain limits. The sterling equivalents of these limits are currently 250,000 pounds ($345,000) for goods leaving a member state (dispatches) and 1.5 million pounds for goods arriving (arrivals). The scope for confusion here is at least twofold:
- For calendar year 2021, all U.K. businesses must continue to make returns for arrivals if they exceed the limits. NI businesses must make returns for both arrivals and dispatches for as long as the Protocol continues, which is set to be at least four years.
- In determining whether they exceed the limits, businesses operating both in NI and GB will have to monitor total movements during 2021 but thereafter only movements between the EU and NI.
EC Sales Lists: EU rules require VAT-registered businesses to complete “recapitulative statements” of supplies of goods and services made to VAT-registered businesses in other member states. The U.K. has always called these “EC Sales Lists.” NI businesses must continue to complete these in respect of supplies to EU VAT-registered customers but only in respect of goods.
What has not changed? There is still one U.K. VAT register that will include GB and NI businesses. The rules for services are mostly unchanged. Intra-U.K. supplies largely continue to be subject to U.K. VAT rates and rules. And U.K. VAT returns will still have nine boxes, although some of the descriptions will change (Boxes 2, 8 and 9).
The NI Protocol is designed to ensure that NI businesses have unfettered access to both the EU market for goods and the whole GB market. Those responsible for its implementation have some way to go in addressing the challenges currently facing businesses on both sides of the Irish Sea. That said, the Protocol presents NI businesses with the continuing opportunity for the free access to the EU market that is no longer available to their counterparts in GB.
- Be aware of the differences in rules between goods and services sold and delivered to final consumers.
- Think about having a warehouse in NI to supply both the EU and the U.K.
- Make sure you get the VAT accounting right if you move goods from GB to NI without selling them.
- Make sure to have the appropriate evidence requirements for exports.
- Be mindful of the reporting differences between GB and NI businesses.
- Don’t forget the “XI” prefix if invoicing for goods sold under the Protocol.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Terry Dockley is a VAT consultant at Terry Dockley & Co, VAT specialists. He is a Chartered Tax Adviser, and has specialized in VAT for 30 years. Una McKearney is Senior Associate, Tax with CavanaghKelly. She has over 15 years’ experience in taxation and oversees all tax investigations for the firm.