How the Brexit deal would affect VAT and trade

Towards the end of last week Prime Minister Boris Johnson was confident that a deal was on. He was clear, all that was needed was for Parliament to sit on Saturday for the first time in 37 years, and he sounded confident that he had the cross-party backing he required.

However enter former Tory, now Independent, Sir Oliver Letwin’s MP cross party motion to “withhold approval” until legislation implementing Brexit has been passed. 

It was close – with the government losing by just 16 votes, 322 to 306. 

Under the terms of the ‘Benn Act’ the Prime Minister was left with no option but to send a letter to Brussels requesting a three-month Brexit delay to 31st January 2020,  by 2300 the same evening, which he duly did.

However, not only did Boris submit the Benn Act letter. Albeit unsigned and noting it was from Parliament. He also, sent a second longer, signed letter stating that he believes a further delay to Brexit would be costly to both the UK and to the EU.

Where are we now?

Although there remains a strong possibility that the EU will accept the UK’s request for a further extension, the UK’s Prime Minister is adamant that Britain will leave the EU at the end of the month.

While an orderly 31st October Brexit is by no means certain, those in business, accountants and bookkeepers should look at the UK government and HMRC’s Brexit web-based support service, as it will help all those with a business interest to plan or provide added-value help and advice to your employers or clients.

With all the focus being on a no-deal Brexit it’s easy to forget that a deal is entirely possible and that we should all be planning for the eventuality at the same time as for a no-deal.

Getting ready for Brexit’ is the government’s website landing page for all things Brexit. While it has been updated to acknowledge ‘A Brexit deal has been agreed in principle with the EU’ it also recognises that ‘both the UK and the EU need to approve and sign the withdrawal agreement.’

What are the key elements of the deal?

The new protocol thrashed out last week replaces the controversial Irish backstop plan in Theresa May’s deal. Although much of the rest of that deal will remain. 

Here are some of the key new aspects to the proposed EU withdrawal agreement:

Customs 

Ultimately, the whole of the UK is destined to leave the EU customs union. Leaving it free to enter into trade deals with other countries in the future.

There will, however, be a legal customs border between Northern Ireland and the Republic of Ireland (which stays in the EU). But, in practice the customs border will be between Great Britain and the island of Ireland. With goods being checked at “points of entry” in Northern Ireland. 

Import duty will not automatically have to be paid on goods coming into Northern Ireland from Great Britain. Although, where something is “at risk” of then being transported into the Republic of Ireland (which remains part of the EU customs union) duty will be paid.

What is considered ‘at risk’ is to be decided by a joint committee made up of UK and EU representatives.

Regulations on goods

When it comes to the regulation of goods, Northern Ireland will be required to comply with the EU single market rules, rather than those of the UK.

This removes the need for product standard and safety checks on goods at the Irish border. Although, it will add to the checks between the rest of the UK. As the UK mainland will not be obligated to stick to the single market rules.

Enforcement

Enforcement will be carried out by UK officials at “points of entry into” Northern Ireland. With EU officials having a right to be present and possibly able to overrule UK officials.

Norther Ireland, has a right to an opinion

With Northern Ireland standing apart from the rest of the UK when it comes to customs and other EU rules, the deal gives its Assembly a vote on these provisions.

That said the NI Assembly will not vote until January 2025, at the earliest. Four years after the end of the transition period, due to run until the end of 2020.

If the Assembly votes against the provisions they would lose force two years later during which time the “joint committee” would make recommendations to the UK and EU on “necessary measures”. 

If the Assembly accepts the continuation of the provisions by a simple majority, they will then apply for another four years. However, if the deal gains “cross-community support” they could apply for a further eight years, or until a new agreement on the future relationship is reached if that comes sooner.

If the Assembly is still not sitting at that point the UK government has said it will make alternative arrangements for the vote.

VAT 

Another interesting feature of the revised agreement is that EU law on Value Added Tax will continue to apply in Northern Ireland as far as goods are concerned, but not services.

This could lead to the curious scenario whereby Northern Ireland could have different VAT rates to the rest of the UK. Something that currently would not be entertained under existing EU law.

For example, if the UK decided to reduce the general rate of VAT on welfare items, such as smoking cessation products or air source heating pumps to, say, 2.5% Northern Ireland would still have to keep it at 5%. As the latter percentage is the EU minimum.

It also means that Northern Ireland may get the same VAT rates on certain goods as the Republic of Ireland, to stop there being an unfair advantage on either side of the border.

What’s left from the May deal?

Much of Mrs May’s original Brexit deal will remain. Some of the key areas are:

Transition

The transition, the period of time during which all of the current rules stay the same allowing the UK and the EU to negotiate their future relationship, is due to last until the end of December 2020.

The UK will need to abide by EU rules and pay into the EU budget but will lose membership of its institutions.

The transition can be extended, but only for a period of one or two years. Both the UK and EU must agree to any extension.

Rights of the citizen

UK citizens in the EU, and EU citizens in the UK, will retain their residency and social security rights after Brexit.

The current freedom-of-movement rules remain unchanged throughout the period-of-transition. With anyone who is resident in the same EU country for five years allowed to apply for permanent residence.

Money

The UK will still have to settle its financial obligations to the EU. The amount owed was recently estimated to be £33bn. With previous estimates putting it as high as £39bn.

The biggest part of the “divorce bill” will be the UK contributions to the 2019 and 2020 EU budgets. As the UK has already delayed its EU exit, some of that money has been paid as part of the UK’s normal membership contributions already.

The Office for Budget Responsibility predicts that around three-quarters will be paid by 2022. With some relatively small payments continuing until the 2060s.

Future UK/EU relationship

This is addressed in the political declaration. The current text, is not legally binding and has been revised by UK/EU negotiators.

The declaration states that both sides will work towards a Free Trade Agreement (FTA). With a high-level meeting set to take place in June 2020 to take stock of progress towards this goal. 

It also contains a new paragraph on the so-called “level playing field”. Which concerns the degree to which the UK will agree to stick closely to EU regulations in the future.

While specific references to a “level playing field” does not appear in the legally binding withdrawal agreement, the revised declaration states that the UK and the EU should “uphold the common high standards… in the areas of state aid, competition, social and employment standards, environment, climate change, and relevant tax matters.”

Keep up to date with the latest updates on Brexit here: How accountants and businesses should prepare for Britain leaving the EU

Brian Palmer is the tax policy adviser for AAT.

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