UK Indirect Tax changes

Richard Staunton

While Brexit seems a distant memory, the relationship between the UK and the EU continues to evolve. Changes are in the pipeline that will have an effect on cross border supplies as well as the indirect tax system in Northern Ireland. Some examples discussed in this article are the Windsor Framework (WF) and the current position with regard to the retention of EU laws in the UK.

Windsor Framework (WF)

The relationship between Great Britain (GB), Northern Ireland (NI) and the European Union (EU) has been a source of some tension. The Northern Irish Protocol attempted to address issues caused by Brexit that could disturb the Good Friday agreement. However, the protocol was not accepted by many in NI because it caused a barrier to trade between NI and its largest market, the rest of the UK (Great Britain).

The WF is an attempt to address many of the problems caused by the Northern Irish Protocol. It is only an agreement in principle until it is passed through the House of Commons and it is likely that MPs will get to vote on it. The adoption of the agreement will halt the Northern Ireland Protocol Bill and the infringement proceedings by the European Commission brought against the UK in relation to the bill.

The Northern Ireland Protocol has resulted in significant disruption to trade between GB and NI during this period and the Windsor Framework attempts to restore the smooth flow of trade within the UK internal market while maintaining Northern Ireland’s privileged access to the whole of the EU market.

In theory, The Northern Ireland Protocol created a hard border between GB and NI for goods moving either way, ie NI to GB and GB to NI. However, the UK Government did not enforce customs declarations for goods moving from NI to GB, either in respect of export or import declarations. The EU on the other hand did require both export declarations for goods from GB to NI and customs declarations for the same movement of goods when imported into NI. This was needed to maintain the integrity of the single market but created friction both politically and commercially.

The WF puts in place a full new set of arrangements for internal trade, known as the ‘green lane’ for goods which are intended for consumers in NI only. Goods sold in NI will now use commercial information rather than customs processes as the Irish Sea border has been effectively removed for UK internal trade. This will be underpinned by new data-sharing arrangements using commercial data and technology to monitor trade flows and the real- time data element will remove a lot of bureaucracy which is required for goods moving into the EU. It is important to note that goods moving into the EU will be subject to normal third country processes and requirements.

This means that Northern Ireland’s businesses can access the UK market on a permanent basis. Some controls will remain on certain controlled goods (e.g. endangered species) and goods under customs procedures (e.g. goods under transit) will still be subject to documentation.

Again, under the Northern Irish Protocol EU VAT and Excise rules applied in NI in relation to goods to avoid a hard border. This prevented the UK government from applying any VAT and Excise changes UK-wide. Under the new agreement legally binding changes have been made to ensure that NI will benefit from the same VAT and alcohol taxes as the rest of the UK.

The result of these changes, if passed, mean that NI can apply the zero rate to energy saving materials, such as heat pumps and solar panels which have already been introduced in GB. In addition, it ensures the reforms to alcohol duties due to take effect this summer will apply UK wide. Various other tweaks guarantee NI’s position within the UK VAT and excise area while still maintaining frictionless arrangements through staying in the single market and customs union for those businesses trading with the EU.

The WF seems to herald a more collaborative relationship between the UK and the EU and it is likely this new relationship will be built upon.

Retention of EU law

This is a very topical subject at the moment. The Retained EU Law Bill was set to revoke most remaining EU derived law in the UK under a sunset clause ending in December 2023.

This of course would have affected VAT legislation.

The UK business and trade secretary Kemi Badenoch has announced that they will scale back their plans and 550 pieces of legislation will be scrapped with 3,000 left on the statute books to be reformed or scrapped in future. This is a major U-turn. Government sources say this is because officials had not had time to scrutinise all the legislation due to be revoked and were worried about the unintended legal consequences.

The future

It is clear that the UK and the EU are still carefully navigating through the Brexit process and new agreements will undoubtably be negotiated in the future. The retention of the majority of EU law has come as a surprise as the sunset clause was very much a major plank in the Prime Minister’s leadership bid. For this reason, it is likely that, assuming there is no change of government, much of the EU legislation will be cancelled over time. This is already happening in the world of VAT. As mentioned, changes to the law previously refused under EU legislation such as the installation of energy saving materials has now gone ahead. Furthermore, HMRC have started a consultation on whether to maintain the land exemption for VAT. If adopted this would fundamentally change the landscape for land and property and VAT in the UK.

It is likely that over time UK VAT law will diverge from EU legislation which means that assumptions now made when comparing UK and EU VAT and other indirect taxes will become less relevant and less relied upon.

XLNC MAGAZINE | No. 11 | Spring 2023


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