On 17 December 2020 the EU-UK Joint Committee formally endorsed all decisions and other practical solutions related to the implementation of the Withdrawal Agreement, applicable from 1 January 2021, , write Johnny Hanna and Frankie Devlin of our Brexit Response team.

This followed the publication on 10 December by the UK Government of its Command Paper and the accompanying Decisions.

The Decisions that were published with the Command Paper contain the legal text of what has now been formally agreed by the EU-UK Joint Committee on 17 December and it is the precise wording of these legal texts on matters such as when goods are not “at risk”, that will determine how the decisions are implemented and not the Command Paper.   

The Protocol which was agreed as part of the Withdrawal Agreement seeks to avoid a hard border in Ireland, protect the EU Single Market and maintain Northern Ireland’s place in the UK internal market. It provides that whilst NI remains part of the UK VAT area and Customs territory, it also has access to the EU’s Single Market and to achieve this Northern Ireland (“NI”) is required to continue to apply EU Customs rules, Single Market rules on goods coming in and out of NI, as well as applying EU VAT rules on goods traded in NI.

The Protocol will become legally effective from 1 January 2021, irrespective of whether a Free Trade Agreement (“FTA”) is agreed or not between the UK and EU. Now that the formal decisions and practical solutions have been agreed, the UK Government has withdrawn clauses 44, 45 and 47 of the UK Internal Market Bill which could have threatened the full implementation of the NI Protocol. 

Although many of the clarifications and derogations are positive, it has come very late and it will be a significant challenge and, in some cases, impossible for businesses to be ready for 1 January 2021 in respect of all of the trade, custom, regulatory, VAT and other changes.  A number of the derogations have been required as the UK is not fully ready for the end of the transition period, in particular, regarding the import of food products from GB into NI. For this reason, the EU and UK have agreed a number of unilateral declarations to provide time limited solutions (i.e. grace periods) in a number of areas, such as Export Health Certificates, import of meat products, medicines and a number of other areas.  

To some degree the additional safeguards may provide a softer landing for NI businesses than other parts of the UK, particularly if a trade deal cannot be agreed and tariffs are imposed on trade between the EU and UK. If there is a zero-tariff trade agreement then some of the complex criteria to determine if goods are not considered to be in the ‘at risk’ category may become less relevant, or at least be simpler to operate. The ‘at risk’ rules are discussed in detail below.

The main issues that have now been endorsed and agreed between the EU and UK relate to the following areas:

  1. Unfettered access to the GB market;
  2. No tariffs on internal UK trade, (whilst also allowing for checks on goods at risk of moving through NI into the EU), and;
  3. Further supporting trade from GB to NI, including grace periods; 
  4. VAT

A number of other areas are covered including, state aid rules, SPS checks, continued flow of medicines into NI and the Single Electricity Market.  We summarise the main areas below:

1. Unfettered access NI to GB

  • The Command Paper sets out how unfettered access to the GB market will continue to be available to NI businesses.  This will include a light touch approach in a Phase 1 period (which is expected to last until the second half of 2021) during which “qualifying NI goods” will be able to be placed on the GB market in cases where the goods move either directly from NI, or indirectly through ROI, for example, via Dublin Port or Rosslare.  Qualifying NI goods for the purposes of unfettered access will cover goods that are in free circulation in NI during this Phase 1 period.  The legislation to enact this is included in the Customs (Northern Ireland) (EU Exit) Regulations 2020 which forms part of the overall Taxation (Post-Transition Period) Act and these have now received Royal Assent and will become legally effective from 1 January 2021. Also included in the Act is anti-avoidance legislation to prevent traders re-routing goods through NI simply to avoid tariffs and other customs requirements and this will also be in place by 1 January 2021. However, if moving goods via NI is already a normal commercial route used by businesses, including ROI businesses, they should be able to continue to use the NI route into GB to obtain unfettered access during the Phase 1 period.
  • It is the intention that unfettered access should in the longer term only be available to genuine NI businesses and as such a longer term framework of rules (Phase 2) is proposed for later in 2021 which will aim to identify “qualifying traders” as they check into ports and airports through an auto-enrolment system for qualifying traders, so that their goods can move into GB without further customs controls, or tariffs. This new Phase 2 system is proposed to be ready by the second half of 2021 and we will have to wait for the criteria to be set out, however, it is likely that an NI establishment test will need to be satisfied.
  • It has been agreed that businesses will not be required to submit Export and Exit Summary Declarations for most goods when moving from NI to GB - however, the relevant data will be collected by alternative means, for example, data collected by ferry companies through other systems.  In only limited cases will businesses be required to provide customs declarations for NI to GB movements, relating to international obligations for high risk goods and for goods not in free circulation (i.e., goods moving under special procedures including transit movements).

2. No tariffs on internal UK trade

(and checks on goods at risk of moving through NI into the EU)

  • The Protocol set out an “at risk” test for goods that enter NI from GB, or a rest of world country (ROW), which means that goods shall not be subject to an EU tariff unless the goods are at risk of subsequently moving into the EU (however, they could still be subject to a UK tariff on ROW goods).  The Protocol set out a two- stage test which essentially said that goods would be classed as at risk unless the goods, are a) not subject to “commercial processing” in NI, and b) not at risk of subsequently being moved into the EU.  The Joint Committee set up under the Protocol and made up of UK and EU officials were tasked with coming up with a set of rules to determine when goods are at risk of moving into the EU. An agreement in respect of “at risk” goods has now been reached to support tariff free internal UK trade, where certain criteria can be met. The Government website includes further details on the process and criteria for declaring goods not “at risk”.
  • The criteria set out in the Decision and now formally agreed has retained the commercial processing element of the test outlined in the Protocol.  The rules are complex and for certain business sectors that carry out manufacturing processes on goods, could be difficult to meet. 
  • Central to getting goods classed as not at risk is a new UK Trader Scheme (for "trusted traders”), which is an authorisation by the business that they will sell or use the goods in NI or the UK and will not move the goods into the EU.  However, it is important to note that further criteria may also need to be met, particularly, where goods are subject to processing in NI.  Further consideration of whether the goods are at risk or not will therefore also need to take account of the following:
    • whether the goods will be subject to “commercial processing” in NI, or not,
    • whether the goods have been imported directly into NI from GB, or from a rest of world country (ROW), 
    • the comparable tariff rates that would apply to the goods under the Union Customs Code (EU tariff), or the UK Global Tariff (UKGT) may also be relevant.
  • As noted already, in addition to the Command Paper, it is important to read the specific legal text and criteria set out in the Decision on the determination of goods not at risk, to determine whether goods can be classified as not at risk.  It should be noted that the wording in the Command Paper does not fully reflect what is in the strict legal text of the Decision.

The UK Trader Scheme

  • Businesses will be able to apply to join the new UK Trader Scheme (for “trusted traders”) if they are:
    • Established in NI, or established in GB and have an indirect representative in (which could be the trader support service), and have a fixed place of business in NI where records are available and where goods are sold to, or provided for final use by, end consumers
    • Have no history of serious customs or tax infringements
    • Have sufficient control of their operations and record keeping capability to ensure they can provide evidence to support their not “at risk” declarations.
  • If your business meets the criteria, you will need to provide HMRC with basic information when applying, including details of the business and directors, EORI number, VAT number, date of establishment and address. Businesses that are importing goods into NI from 1 January are advised to submit applications before 31 December 2020 and HMRC may in these cases provisionally authorise businesses for up to four months while their applications are being processed.
  • The criteria set out above to join the UK Trader Scheme would seem to make it difficult for GB suppliers, that do not have NI operations with a fixed establishment, to avail of the UK Trader Scheme. This may have implications for GB suppliers that supply goods to NI customers under DDP (“Delivered Duty Paid”) terms where they are acting as the importer and may be required to pay tariffs at time of import, as they would not be able to declare the goods as not at risk under the UK Trader Scheme.  In this case, they would be required to claim the tariff back under the reimbursement scheme. This could lead to additional cash flow costs for GB suppliers who may therefore be reluctant to supply under DDP terms.  Further clarity is required on this potential issue from HMRC.
  • Where the business is eligible for the UK Trader Scheme it will potentially cover goods that come into NI either from GB, or from rest of world (ROW) countries, however, the specific authorisation and tariff tests are different depending on whether the goods are imported directly into NI from GB or from ROW.  The link to apply for the UK Trader Scheme is available at the top of this section and businesses that qualify are encouraged to apply before 31 December 2020.
  • Although a business may have been authorised under the UK Trader Scheme, it should be recognised that this is a general statement of intention by the business and that the business will still be required at the time a consignment of goods is imported into NI to self-certify on the customs import declaration whether that consignment meets the specific not at risk test, meaning that the goods will not be subject to commercial processing and will not be moved on into the EU. The Government website includes further details on the process and criteria for declaring goods not “at risk”. 
  • Businesses that are authorised to use the UK Trader Scheme must continue to comply with the conditions, or risk their authorisation being suspended or revoked. 
  • The authorisation test under the UK Trader Scheme for goods that come into NI from GB is that the goods are for sale to, or final use by, end-consumers located in the UK.  It should be noted that if the EU tariff rate on these goods coming into NI from GB would be zero, then an authorisation under the UK Trader Scheme may not specifically be required and the goods could simply be self-certified as not at risk at the time of import on the customs declaration. It is however still strongly recommended that businesses that are eligible should apply for the UK Trader Scheme before 31 December 2020.
  • In the case of goods imported directly into NI from ROW, the authorisation test to be considered not at risk has two parts. Firstly, that the goods are for sale to, or final use by, end-consumers located in NI and secondly; the UK tariffs must be no more than 3% lower than the EU tariffs.  It should be noted that where the UK tariff on these goods imported directly into NI from ROW would be equal to or higher than the EU tariff, then the business would not need to be authorised under the UK Trader Scheme and they could self-certify the goods as not at risk at the time of import on the customs declaration.  However, goods that are not at risk will still be subject to whatever UK tariff is applicable on imports from ROW.
  • The objective of the UK Trader Scheme rules  is that only goods genuinely at risk, or intended to be moved into the EU will be subject to EU tariffs on entry into NI and this will mean that EU tariffs will not apply to non-processed goods which can be shown to remain, be used or consumed in NI and the rest of the UK. This will undoubtedly assist those businesses, for example, retailers, including supermarkets in NI, that only supply their goods to consumers in NI and do not carry out any process on the goods in NI.  These businesses should in the main be able to avail of the UK Trader Scheme and declare on their customs import declaration that most if not all of their goods are not at risk and not subject to an EU tariff.

Commercial Processing

  • As outlined earlier, the goods at risk test outlined in the Protocol also includes a “commercial processing” condition and it should be noted that a good will always be considered to be at risk if it was brought into NI for commercial processing (with the exception of specific types of processing in certain sectors as set out in the Decision formally agreed between the EU and UK and listed below).  The definition of commercial processing in the Protocol is very broad, including any alteration or transformation of the goods in any way.  The UK Trader Scheme alone will therefore not enable commercial processors to declare their goods as not at risk at the time of import.
  • A strict application of the Protocol would have meant that all goods moving into NI from GB, or ROW that are subject to any commercial processing in NI would have been deemed to be at risk goods.  It has therefore been agreed that a number of specified processing activities in certain sectors (referred to as “Approved Processing Sectors”) will qualify for a derogation that their activities can be classified as non-commercial processing.  The specific areas covered by the derogation are as follows:
    • the sale of food to end consumers in the UK,
    • construction, where the processed goods form a permanent part of a structure that is constructed and located in NI by the importer,
    • direct provision of health or care services by the importer in NI,
    • not for profit activities in NI, where there is no subsequent sale of the processed good by the importer,
    • the final use of animal feed on premises located in NI by the importer.
  • This should mean that these specific activities carried out in these specific sectors can be classed as “non-commercial processing” but clearly this is not providing a blanket derogation for whole sectors. It should also be highlighted that businesses that meet the criteria set out in the specific Approved Processing Sectors, may still be subject to the additional at-risk tests set out above under the UK Trader Scheme.  This means that unless the EU tariff rate is zero (for goods imported from GB), or the EU tariff rate is equal to or less than the UK tariff (for goods imported from ROW), businesses that carry out non-commercial processing will still need to meet the authorisation requirements under the UK Trader Scheme, that goods imported from GB are for sale to, or final use by, end-consumers located in the UK, or in the case of the importation of ROW goods, they are sold or to be used in NI (and also the UK tariff rate must not be more than 3% lower than the EU tariff).  
  • The non-commercial processing derogation also applies to small businesses with turnover of less than £500,000, however, in this case also, the additional at risk criteria set out above relating to the UK Trader Scheme (i.e., are the goods for sale to, or final use by, end consumers in NI or the UK), will also need to be met in most cases, so again this is not a blanket derogation for small businesses with turnover below £500,000.
  • Businesses that cannot declare at the time of import of goods that they are not at risk, will therefore be liable for any applicable EU tariff on those goods.  These tariffs may be reimbursed where it can subsequently be shown that the goods have been sold to, or used in NI, or the UK and not moved into the EU.  HMRC have indicated that they are currently working on the reimbursement scheme and how applications will be submitted, and payments made.
  • It should also be noted that a business may claim a de minimis tariff waiver which may be granted to an undertaking where the EU tariff that is due does not exceed €200,000 in total over three fiscal years. Guidance has recently been published on the Gov.uk website setting out the criteria for claiming a waiver. Whilst this may be of some assistance to some businesses, for large importers the de minimis amount is likely to be exceeded.
  • Clearly, many manufacturing businesses that carry on projects across both the UK and EU may find it difficult to meet the criteria to declare goods as not “at risk”, as they may not know at the time of import which project the goods will end up being used in, and even manufacturers that only carry on projects in NI will not meet the criteria unless they fall into the derogation for the Approved Processing Sectors.
  • Manufacturing businesses that cannot avail of the derogations or tariff exemptions, may therefore wish to consider using certain customs procedures to mitigate or defer payment of tariffs on at risk goods.  A customs procedure known as Inward Processing Relief (“IPR”), which suspends the payment of any tariffs at the point of import, may provide a business with the time and flexibility to defer the duty point until the time of sale and release from IPR on those goods that are actually moved on to the EU and therefore subject to the EU tariff only at that point.  The remaining products if sold into the UK market would not be subject to an EU tariff. In the Command Paper, reference is made to IPR and the potential for its use to be expanded in NI where required but this will require specific procedures to be followed by business before approval by HMRC.  This may be a viable option for some manufacturing businesses who are faced with a substantial up-front EU tariff liability that may not be available for reimbursement (if at all) for many months after it has to be paid. We await further details on these issues from HMRC.
  • Whilst elements of what has now been agreed between the EU and UK on the at risk issue are to be welcomed, the rules will be complex and for many businesses, particularly those involved in processing, may find that they cannot meet the criteria and at least a portion of their goods will fall into the at risk category and therefore an EU tariff will apply.
  • In the event that an EU-UK FTA is concluded, this standalone agreement set out in the Command Paper will remain important for goods moving into Northern Ireland. It would mean that Northern Ireland businesses using the UK Trader Scheme would not need to complete origin certification; and if goods could not qualify for tariff-free trade under the FTA Rules of Origin requirements, they could still be traded tariff-free under this deal by those businesses within the scheme. 
  • The UK Trader Scheme will be monitored with the option that an emergency break could be applied in 2024 if it is being abused. Under the provisions, this emergency break could be applied at any time if it is abused.  If either the EU or UK considers there is a significant diversion of trade, or fraud or other illegal activities, it can inform the other party in the Joint Committee by 1 August 2023 and the parties shall use their best endeavours to find a mutually satisfactory resolution.
  • The Gov.uk website has recently been updated to include information regarding the “at risk” criteria, authorisation for the UK Trader Scheme and claiming a waiver.


Customs Declarations

  • Customs declarations and safety and security declarations will be required on imports of goods from GB into NI from 1 January 2021. This will bring additional compliance requirements and costs for businesses, however, the Trader Support Service (“TSS”) which was launched in September and will run for a period of at least two years will support businesses to file declarations. Businesses have been strongly advised to register for the TSS and decide if it wants to use this service to complete customs declarations. Alternatively, businesses may decide that they wish to make their own arrangements to submit the customs declarations themselves, or to employ a customs agent to do so from 1 January 2021.  The TSS has been providing on-going education to traders for the past few months and also businesses that are registered with TSS will automatically receive an XI EORI number.  Businesses will require an XI EORI to export and import goods with rest of world countries and also to import goods from GB into NI, as the importer will need to report this on the customs import declaration. 

3) Further supporting trade from GB to NI

  • The Command Paper sets out a commitment to protecting the special status of agri-food movements from GB to NI.  It has now been formally agreed that specific solutions will apply for food supply chains as it is recognised that the UK is not fully ready for the end of the transition period.
  • This will a provide a three-month grace period until 1 April 2021 from the requirement to provide export health certificates (EHCs) as long as strict conditions are met.
  • It has also been agreed to allow the import of certain chilled meats from GB to NI for a period of six months only.  Strict conditions will apply during this period, including that the products must be fully aligned with corresponding EU legislation, that they subject to checks and controls when entering NI, and that they will only be made available to end consumers in NI.
  • It has also been announced that the Government will provide new funding to develop an end to end digital system known as the Movement Assistance Scheme (MAS), to enable goods to move in a streamlined way after 1 April 2021.  This may provide a simplified means to deal with requirements relating to EHCs and the costs will be met under the new MSA.

4) VAT

  • In respect of VAT, the NI protocol will mean that the VAT rules applying to trade in goods relating to NI will in some cases significantly change with additional complexities for businesses. Supplies of goods between NI and GB will be exports and imports, although the UK Government will in most cases require the supplier to continue to account for the VAT as they do now.  The UK has published a VAT Policy Paper and related guidance setting out how it proposes to operate VAT in respect trade in goods between Great Britain and Northern Ireland;
  • The relevant legislation has been included in the recent Taxation (Post Transition Period) Act.
  • Further changes in certain VAT rules will also apply from 1 January 2021 in respect of supplies of services as a result of the UK exiting the EU.  As services are not covered under the Protocol, these rule changes related to services will apply to the whole of the UK including NI.  In particular, rules will change relating to the place of supply for certain B2C supplies, as well as changes under “use and enjoyment” rules.  Additionally, UK (including NI), financial service businesses that provide VAT exempt financial services to customers located in EU countries may also be able to significantly improve their existing VAT recovery position after the end of the transition period.  A summary of some of the main issues for businesses to be aware of can be viewed in our recent KPMG VAT article.
  • The Command Paper also highlights that the second-hand margin scheme will no longer apply to goods brought from GB into NI to be sold in NI.  VAT will have to be paid on the full sales price rather than the margin.  This issue is of particular concern to the second-hand car industry in NI.  The Command Paper indicates that the UK Government are looking at ways to resolve the issue and are discussing it with the EU. 

KPMG Comments

Whilst the NI Protocol is by no means perfect and was always going to be sub-optimal to having full membership of the single market and customs union as is the case for EU members, it does at least provide some additional protections to NI businesses, particularly if a comprehensive FTA is not agreed between the UK and EU.  NI businesses will, in many cases, be able to trade as before with the EU, with continuing tariff free access and no customs procedures which will clearly not be the case for the rest of the UK.

The Protocol was never meant to stand alone, and a comprehensive FTA would greatly assist the opportunities that the Protocol may provide in the future.  It would greatly simplify the complex “at risk” goods system highlighted above, that will otherwise be apply on goods imported into NI from GB and ROW.  Even if a thin trade agreement that includes zero-tariffs is agreed, this should make the at-risk requirements much less onerous and costly for businesses.  NI businesses also need to get continued access to EU FTAs with third countries, as this is required to retain and grow both the all-island economy with its closely linked supply chains but also to promote further export opportunities for businesses across the island.  Whilst this is not provided for in the Protocol, businesses and their representatives continue to lobby for this with Government in Ireland, the UK and at EU Commission level.

However, there are still many areas that businesses have just not had the time to prepare for given the lateness of some of the Government announcements regarding customs, VAT and other regulatory issues with too little time to prepare for 1 January. Although the Trader Support Service may prove to be of great benefit to businesses in dealing with customs obligations, businesses are still not clear what details they must provide to the system to ensure customs declarations can be submitted.

Businesses in Northern Ireland should continue to follow the on-going developments in the wider EU-UK negotiations and the daily updates as this could impact on some of the operational aspects under the Protocol.  Also, HMRC have now created a Northern Ireland landing page which brings together relevant information for businesses to prepare for the end of the transition period and it is advisable to review the information included here which is likely to be updated on a regular basis.

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