Several key changes relating to trade between Northern Ireland and Great Britain were announced in the Windsor Framework. The UK government’s intention is to bring in the changes on a phased basis over the next 18 months, up to October 2024. Our tax team have summarised below our insights and the current proposals for their implementation.
Duty reimbursement scheme and duty waiver scheme
The long-awaited customs duty reimbursement scheme which was to be implemented in 2021 is expected to be brought into operation over the summer in 2023. HMRC should be publishing guidance on how the scheme will work over the coming weeks.
The scheme will allow for reimbursement of EU duty for goods imported into Northern Ireland where a business can evidence that the goods did not move into the EU. This scheme will cover “at risk” goods under the current arrangements and goods that are moved in the “red lane” when it replaces the current “at risk” arrangements.
Claims can be made for any customs duty paid, going back to January 2021. To make a claim, the business will need to provide evidence that the goods meet the reimbursement criteria that HMRC will set out in guidance. This will include scenarios where the goods have been consumed in NI, the final sale of goods was in NI, the goods were permanently installed in NI or the goods were exported to rest of world.
HMRC also intend over the summer 2023 to introduce an improved duty waiver scheme which will have a new digital application process. This scheme allows businesses to claim a waiver from payment of customs duty on “at risk” goods where the amount of duty involved remains below specific limits set out under EU state aid rules.
Most businesses can claim up to a maximum of €200,000 of aid over 3 tax years, with the 3-year period being assessed on a rolling basis. The maximum allowance includes all de minimis aid claimed over a period of 3 years, including aid which is not related to customs duty, such as employment allowances. More details should be included in forthcoming HMRC guidance.
New UK Trusted Trader Scheme
The current UK Trader Scheme (UKTS) is being replaced by a new expanded trusted trader scheme which is known as the UK Internal Market Scheme (UKIM). For businesses already registered under the existing UKTS, goods movements up to 30 September 2023 can be moved as not “at risk” using this authorisation.
If you have an existing UKTS authorisation, HMRC should be in contact, advising that the business will need to enrol in the new UKIM so that goods can be moved as not “at risk” after 30 September 2023. For businesses that are not already registered in the UKTS, they will not be contacted by HMRC but can apply to register for the new UKIM scheme if they meet the criteria.
HMRC will set out the process and criteria for applying to join the UKIM in guidance expected in the next few weeks. We understand that as the scope of the scheme has been expanded, there will be additional criteria to meet to join the scheme. HMRC have indicated that the new scheme will be in operation from 30 September 2023.
The expanded scheme will also be available to UK businesses that are not established in Northern Ireland. There will still be a requirement to have an indirect representative in NI that can act as the customs declarant, and this could be the Trader Support Service (TSS) as is currently the case for UKTS. It will also be necessary, as under the current UKTS scheme, to evidence that the goods being moved into NI are not “at risk” of moving into the EU.
Expanded commercial processing threshold criteria
This new trusted trader scheme will continue to apply once the green lane/red lane customs model comes into operation in October 2024. Therefore, being registered in the new UKIM scheme will be a requirement to access the green lane to move goods under the new simplified arrangements (see further details below in the green lane/red lane section).
The Windsor Framework announced a number of expansions and improvements for businesses moving goods into NI for further processing. These include improved sectoral exemptions for construction, health and care services, animal feed and not-for-profit organisations. It also included scope for intermediaries to benefit from the exemption (which would include someone who acts as the importer and then sells the goods on to a business that operates in one of the sectoral exemption areas). Additionally, the expanded commercial processing threshold test will have an increased threshold from £500k to £2million.
We understand that HMRC intend to allow businesses to move goods under the expanded commercial processing threshold criteria mentioned above from 30 September 2023, when the new expanded trusted trader scheme comes into operation.
More guidance should be issued by HMRC in the coming weeks on the above issues.
Green & Red Lane for SPS goods
The Windsor Framework set out several key changes that will be phased in regarding sanitary and phytosanitary (SPS) requirements for agrifood and other retail goods moving into NI, where the goods will be for final sale in NI.
This will be delivered under a new SPS/retail focused UK Internal Market Scheme (UKIM), which will be distinct from the customs focused UKIM referred to above, albeit there will be significant overlap. The focus for SPS/retail goods movements is to enable retail goods to be moved through a green lane by eligible trusted traders.
This new SPS/retail focused UKIM scheme and related green lane will come into effect from October 2023 (which is different to the green lane for customs which will not be fully operational until October 2024). This means that businesses that are registered for the SPS/retail focused UKIM scheme can start to use the simplified processes available under the green lane process from October 2023. This should reduce the number of documents, certifications and checks required for SPS agrifood goods that are for final sale in Northern Ireland and can be moved through the green lane process. This should also mean that the current SPS grace periods under the Northern Ireland Protocol will no longer be required to move certain types of goods such as British sausages.
Safeguards
For the green lane to operate as proposed for the movement of agrifood goods, whilst at the same time protecting the single epidemiological area on the island of Ireland, the UK will provide certain guarantees and safeguards. One of these safeguards relates to new labelling requirements which will be phased in over the next few years.
The commencement of new labelling requirements will be from October 2023 in respect of meat and fresh dairy. From October 2024 these requirements will be extended to include all other dairy products, such as UHT milk and butter and it is proposed that this will be on a UK wide basis from that date.
From July 2025, composite products, fruit, vegetables and fish will also be labelled on a UK wide basis. Notably, new “not for EU” labelling requirements have a 1 October 2023 deadline for implementation. There is a concern across the retail sector that in the absence of further operational guidance across the supply chain, the October 2023 deadline will be a significant challenge.
Retailers and the wider business sector will no doubt want to be compliant, however, the challenge of meeting the 1 October 2023 Windsor Framework labelling requirements, as well as the additional preparations for the Border Target Operating Model on 31 October (see further detail below), is concentrating a lot of significant changes into a limited timescale for businesses over the coming months.
As EU standards on animal and plant health will continue to apply in NI, appropriate mechanisms need to be put in place to manage regulatory divergence over time, to protect both businesses and consumers. Therefore, further clarity is required from UK government on how this will be operated and managed.
Green & Red Lane for Customs
As noted above, the green lane for SPS purposes will commence this October 2023, however, for customs purposes the green lane model will not become fully operational until October 2024. Therefore, until October 2024, the current customs requirements under the Northern Ireland Protocol will largely continue to apply.
Whilst this includes the continuance of the existing grace period easements for customs, it does mean that in the absence of the green lane process, the requirement to submit full customs declarations will continue for all goods imported into NI, irrespective of whether the goods move into the EU or not. Therefore, businesses will need to be clear on what their obligations are during what will be a period of transition until the new Windsor Framework green/red lane proposals are fully implemented in October 2024.
When the green lane becomes operational in October 2024, the various Windsor Framework customs process simplifications will apply. This should provide for a significant reduction in administration for importers using the green lane, as the system being developed should mean that existing commercial data relating to goods movements and the businesses unique trader profile from its trusted trader registration (UKIM) can be used to pre-populate required data fields in the Trader Support System (TSS), as well as systems operated by customs brokers that act for businesses outside TSS.
We understand that further details of what these data fields (known as H8) will consist of will be published in the coming weeks by HMRC. It has also been confirmed that the TSS will continue to be available to support businesses that wish to use it for at least the rest of 2023, with an expectation that this will be extended further.
Trader registration
As noted above, in the section dealing with the new trusted trader scheme, this will be in operation from 30 September 2023 notwithstanding that the green lane for customs purposes will not be fully operational until October 2024. Therefore, businesses will need to act over the next few months to get their new UKIM trusted trader registration. This will be necessary to continue to move goods as not “at risk” from 30 September 2023 but also in order to move goods through the simplified green lane process when it is switched on from October 2024.
We are awaiting further details from HMRC in respect of how more complex green lane movements will operate, for example, fast paced groupage and pallet networks. Additionally, some business sectors currently apportion mixed loads between “at risk” and not “at risk” goods and we are waiting further clarity on how the new green lane/red lane processes will deal with this when operational in October 2024.
We have also learned recently that HMRC intend tidying up XI EORI numbers. EORI numbers are used by exporters and importers of goods and are essential for completion of customs declaration processes. HMRC are writing to businesses that they believe may not be eligible to continue to have an XI EORI number which is specifically for NI based businesses, or businesses that trade in goods that are moved through NI. HMRC want to ensure that only eligible businesses hold XI EORI numbers. It should be noted that an XI EORI number is not required to be eligible for the new trusted trader scheme.
Unfettered Access
The issue regarding unfettered access for NI to trade freely in the UK internal market is clearly a very important issue and the Windsor Framework made further commitments that this would continue to be the case.
Currently under the Northern Ireland Protocol there is a definition for NI qualifying goods that can be moved into GB which essentially means that goods that are in free circulation in NI (i.e., not under a customs procedure) can avail of unfettered access into GB in most cases. The current rules also include an anti-avoidance rule which means that goods that are moved from the EU through NI into GB to avoid normal customs procedures and tariffs will not have unfettered access.
The UK government had indicated in 2021 that there would be a phased approach to implementation of unfettered access, so as to avoid disruption to trade flows, with the intention to introduce further strict criteria to avail of unfettered access.
This stricter criterion was to include a requirement to have a business establishment in NI to benefit from unfettered access. So in addition to the current definition which focuses on whether the goods are in free circulation in NI, an NI establishment criteria was expected to be introduced to meet the unfettered access test. However, we understand that UK government does not have any immediate intention to change the current definition for NI qualifying goods and as such an NI establishment test is not currently being introduced. Therefore, for now anyway the current criteria will continue which is that the goods are in free circulation in NI and the goods are not being moved through NI mainly to avoid customs procedures and potential customs duties.
This is an issue that will require continued monitoring to ensure that NI is not used as a backdoor into GB, not just from a fiscal perspective to ensure tariff and non-tariff obligations are met, but even more importantly for the movement of agrifood goods, where human health needs to be protected.
The current regime for NI qualifying goods to have unfettered access to the GB market will continue to mean there will be no export declarations, no safety and security declarations, no checks or controls when goods leave NI and no customs duty on entry into GB.
As is the case now, export controls are required on a limited group of exceptional goods. This includes endangered species, hazardous chemicals, firearms, persistent organic pollutants, goods placed under special customs procedures. Further details can be found on the HMRC NI landing page
Border Target Operating Model (BTOM)
In April 2022, the UK government decided not to introduce the final set of planned controls on EU imports into GB. Instead, it said it would work with industry to develop a new model for imports into GB. This new Border Target Operating Model (BTOM) applies to imports from all countries into GB and will for the first time implement the new approach for all trading partners, including the EU. It seeks to balance the need for effective border controls with the need to support businesses with import processes that are as simple as possible.
The UK government issued a draft BTOM document (PDF, 12MB) in March 2023, which sets out the proposed new model through engagement with stakeholders and the devolved administrations including Northern Ireland. The objective in publishing this draft document is to allow stakeholders to comment on the proposals before a final version is published in June 2023. The BTOM will have significant implications for all businesses based on the island of Ireland (NI and ROI) that trade in goods with GB.
The model will be phased in over the next few years but will commence its first phase of changes from 31 October 2023. Although the BTOM specifically deals with the movement of goods into GB from EU and rest of world, this will have direct consequences for NI trade in relation to issues such as unfettered access, indirect movements of goods from NI to GB through ROI, as well as indirect movements from GB into NI through ROI. Another issue of real importance connected to the BTOM will be goods movement from the EU that transit through GB into NI.
Importantly the BTOM will mean that from 31 October 2023 there will be a clear distinction in how NI qualifying goods and non-NI qualifying goods (such as ROI goods) will be treated when being imported into GB following dispatch from an Irish port such as Dublin. For example, the BTOM will apply to non-NI qualifying Irish goods, requiring customs and SPS controls. These goods will require pre-notification and there will be a risk-based approach (based on low, medium, high risk) to how these goods are checked and whether export health certificates are required. For NI qualifying goods moving into GB from Irish ports, there should be no new SPS requirements. Further detailed guidance on how this will work will be published by HMRC in the coming months.
In developing the BTOM which has the intention of being a highly digitalised systems-based border that relies heavily on trade data, we are aware that UK government is intending to build a system that can collect data for EU to GB goods movements that can also be used for movements of those goods on into NI, so that NI importers can benefit from a more streamlined process and there is not a duplication of work. The objective of UK government is to have a Single Trade Window by 2025 that greatly simplifies the process for businesses.
We await further updates from UK government on the BTOM and how it will work alongside the Windsor Framework.
VAT and Excise
The Windsor Framework made several announcements regarding VAT and excise which were welcome and which we covered in some detail in our last update. These announcements deal with several areas that were identified as problematic under the Northern Ireland Protocol.
The Windsor Framework cleared the way for NI to now be able to follow UK VAT rates, including any new zero or reduced rates, if these do not create a risk to the EU single market and level playing field criteria are met. These changes are effectively already in place for those affected businesses, including the sale and installation of energy saving materials in NI properties.
We are still waiting for more details on the working of the Enhanced Coordination Mechanism announced in the Windsor Framework which will assist the Joint Committee to review emerging VAT and excise legislation to ensure it takes account of any adverse consequences for NI.
As we have said in our previous updates, the areas of VAT and excise have, with a few notable exceptions such as second-hand motor vehicles and the VAT rate changes, generally been working well under the Northern Ireland Protocol. However, the Enhanced Coordination Mechanism will be very important in ensuring that potential emerging problems are identified in advance and then dealt with before they become costly issues affecting businesses. There continue to be complex VAT reporting requirements for VAT when moving goods between the EU and NI and businesses should continue to comply with these.
Further updates from the UK government and HMRC are awaited in this area.
Other matters
Democratic deficit and Stormont Break
As outlined in the Windsor Framework document, the Stormont brake mechanism will only come into operation when the Northern Ireland Executive is back at work. The brake which is meant to be a safeguarding measure to protect businesses in NI will give the UK government the power to veto new EU rules from applying in NI where certain strict criteria are met. However, until the NI parties are back in government at Stormont, this brake is not in operation.
Retained EU Law Bill
The UK government recently announced that it will not proceed with the Retained EU Law Bill in its current form and instead will take a more gradual approach to remove EU laws from UK domestic legislation. The original intention was to remove all EU laws by the end of 2023 through what is known as a sunset clause. The sunset clause has now been removed.
The UK government will now present to parliament a list of those EU laws it intends to repeal. This approach should avoid the immediate risk of oversight and mistakes by allowing a proper assessment and consultation process to take place. This revised approach has been broadly welcomed by businesses as this should provide more stability and certainty over the trading regulatory framework in the short to medium term. However, we wait for clarification from UK government on what laws are to be repealed by the end of this year and future plans for further law repeal.
Summary
In this update we have highlighted some of the key issues relating to the Windsor Framework as well as the BTOM that will affect all businesses that trade in goods across these islands.
There is clearly a lot to consider in the next 18 months and beyond and due to the phased approach to implementation which is now starting, businesses will need to stay focused on the changes that affect them which may directly impact on supply chains, IT systems, customs and VAT reporting, as well as issues relating to SPS requirements and labelling.
If you would like to discuss any of these issues further do get in contact with our team or your usual KPMG contact.
Johnny Hanna
Partner-in-charge
KPMG in Northern Ireland
Frankie Devlin
Partner, Indirect Taxes – VAT & Customs
KPMG in Northern Ireland