The Protocol on Ireland/Northern Ireland (“The Protocol”) The Protocol on Ireland/Northern Ireland (“The Protocol”) The Protocol on Ireland/Northern Ireland (“The Protocol”)

On 24 December 2020 the EU-UK Trade and Cooperation Agreement (EU-UK TCA) was agreed and  became operational from 1 January 2021. This followed the EU-UK Joint Committee’s formal endorsement on 17 December 2020 of all decisions and other practical solutions related to the Protocol and the implementation of the Withdrawal Agreement which also became operational from 1 January 2021.

Notwithstanding the wider EU-UK TCA on 24 December 2020, the Protocol is the international legal agreement that will govern trade in goods in relation to Northern Ireland (NI) for at least the next 4 years. The legal text included in the December decisions and the guidelines in the December Command Paper set out the main operational aspects of the Protocol, for example, whether goods are “at risk” of moving into the EU and subject to EU tariffs.  Whilst the EU-UK TCA provides the potential for zero tariffs and zero quotas on trade in goods between the EU and the UK, including on goods moving into NI from Great Britain  (GB) and Rest of World (ROW), this will depend on a number of criteria, including complex rules of origin requirements in some cases.

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 NI’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. To achieve this 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. 

A number of late derogations were agreed between the EU and the UK in December 2020, as the UK was 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 the UK agreed a number of time limited derogations (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.  Although there will be a period of time required for businesses and Government agencies to fully adjust to the new trading rules and a number of grace periods have been agreed to ease this transition, the Protocol is now legally effective and fully operational. In this document we have focused on the main (but not all) areas affecting trade in goods for NI. This includes:

1. Unfettered access NI to GB
2. No tariffs on internal UK trade (checks on goods "at risk" of moving through NI into the EU and the new rules of origin tests under the EU-UK TCA)
3. Further supporting trade from GB to NI
4. VAT

We have also included some comments around the new rules of origin conditions set out in the EU-UK TCA and how we see these interacting with the "at risk" rules.

• The Protocol provides for unfettered access for NI goods into the UK internal market. The EU-UK TCA does not include any provisions regarding unfettered access as this is a UK internal market matter.  The previously issued legislation and HMRC guidance on unfettered access sets out the rules that will apply.
• The December 2020 Command Paper includes some details on 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 (QNIG) will be able to be placed on the GB market in cases where the goods move either directly from NI, or indirectly through the Republic of Ireland (ROI), for example, via Dublin Port or Rosslare. QNIG 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 2020 and became legally effective from 1 January 2021. Also included in that Act is anti-avoidance legislation to prevent traders re-routing goods through NI simply to avoid tariffs and other customs requirements and this also applies from 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.
• In the longer term the UK Government intend that unfettered access should 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, so that their goods can move into GB without further customs controls or tariffs. We will have to wait for the longer-term 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).

• The EU-UK TCA does not remove the requirement to apply the "at risk" criteria set out in the Protocol and specifically the  formal agreement reached between the EU and the UK in the December decisions  on "at risk" goods still applies.  As such, when goods enter NI from GB, although the EU-UK TCA provides for zero tariffs on trade between the EU and UK, this will be dependent  on the complex rules of origin requirements being met.  If a zero tariff preference can be claimed under the EU-UK TCA for goods moving from GB to NI, the goods can be declared as not "at risk".  However, if a zero tariff preference cannot be claimed under the EU-UK TCA, businesses will  need to consider the "at risk" rules  to determine if an EU tariff is payable on goods moving from GB to NI. Whilst the EU-UK TCA does not cover goods that are imported directly into NI from ROW countries, the "at risk" rules will still be applicable for ROW imports, as will any free trade agreement that the UK has with that ROW country.  HMRC have provided detailed Guidance on the "at risk" test for both GB to NI and ROW to NI movements, available here.
• The Protocol set out a two- stage test which provides  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 agreement endorsed by the EU and UK on 17 December 2020 in respect of “at risk” goods was reached to support tariff free internal UK trade, where certain criteria can be met.  This agreement  contained provisions for both elements of the two-stage test, i.e. the commercial processing element and the at risk of subsequently moving into the EU element. We cover the main "at risk" issues and also the rules of origin implications for finished goods that are not subject to commercial processing under section a) below.  For goods subject to commercial processing in NI see section b) as further "at risk" criteria needs to be considered.

a)    A good will not be considered to be "at risk" of entering the EU Single Market if:

1. In the case of goods brought into Northern Ireland from another part of the UK by direct transport,
   1.   the duty payable according to the European Union Common Customs Tariff (EU CCT) is equal to zero, (which also now includes where it is zero due to the EU-UK TCA), or
   2. the importer is a recognised under the UK Trader Scheme (“trusted trader”), who is importing that good for its sale to, or final use by, end-consumers located in the UK (including where that good has been subject to non-commercial processing as defined in Article 2 of the December 2020 decision before its sale to, or final use by, end-consumers).  The areas included as non-commercial processing for these purposes is commented on towards the end of this section below.
2. In the case of goods brought into NI by direct transport from outside the UK or EU,
   1. the duty payable according to the EU CCT is equal to or less than the duty payable according to the customs tariff of the UK, or
   2. the importer is a trusted trader who is importing that good for its sale to, or final use by, end-consumers located in NI (including where that good has been subject to non-commercial processing before its sale to, or final use by, end-consumers), and the difference between the duty payable according to the EU CCT and the duty payable according to the customs tariff of the UK is lower than 3% of the customs value of the good.

The above "at risk" tests are complicated and the rules of origin rules under the EU-UK TCA, applicable to GB goods entering NI, will add further complexities for certain products and industries.  However, it should be noted that where goods moving from GB to NI can qualify for a zero tariff under the EU CCT, or for a zero tariff preference under the EU-UK TCA, they can enter NI tariff free without the business needing to use the trusted trader scheme to declare the goods not "at risk". The test of whether goods are "at risk" is determined at the point at which the goods move into NI into free circulation. Whether those goods are able to claim a zero tariff under either the EU CCT, or under the EU-UK TCA at the time of import is the key issue for businesses.  We discuss further in a later section below the EU-UK TCA rules of origin criteria and the interaction with the at risk test.

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 NI (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.
• As the criteria set out above to join the UK Trader Scheme would make it difficult for GB suppliers that do not have NI operations with a fixed establishment to avail of the UK Trader Scheme, it was decided at the end of December 2020 to provide more flexible arrangements for a short period to enable GB suppliers to meet the criteria and provide time for contractual terms to be restructured.
• Although a business may have been authorised under the UK Trader Scheme, it should be recognised 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.
• So although the UK Trader Scheme does not give businesses a blanket exemption that all of their goods are not "at risk", it should 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 processing 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 declarations that most if not all of their goods are not "at risk" and not subject to an EU tariff.
• One other benefit of the UK Trader Scheme is that eligible businesses will not need to complete origin certification; and if goods cannot qualify for tariff-free trade under the rules of origin requirements set out in the EU-UK TCA, they could still be traded tariff-free under this agreement by those businesses within the UK Trader Scheme who can declare that their goods will be used or sold in the UK and not in the EU. 

How does the TCA (including rules of origin criteria) impact on the "at risk" test for goods that fall into the above category (i.e., finished goods not subject to commercial processing in NI)?

• HMRC have issued some detailed guidance in respect of how the rules of origin tests apply. The rules are clearly very complex and at this stage these do not specifically deal with NI and how the rules interact with the “at risk” test. HMRC are currently working on further specific guidance on this to provide NI specific examples and HMRC have indicated this will be available shortly. 
• To determine if an EU tariff is payable, businesses will have to apply the "at risk" test, and  for goods entering NI from GB, depending on the product type and its origin, the rules of origin tests may also apply.
  
• For direct imports of goods from ROW into NI, the rules of origin under the EU-UK TCA are not relevant. If there is a Free Trade Agreement between the UK and the 3^rd country, the rules of origin in that FTA would be relevant. However, the "at risk" tests still apply.
• For goods moving into NI from GB (and note in this section we are referring to finished goods not subject to commercial processing in NI), the first thing to do would be to check if the EU tariff on that product would be zero under the EU CCT. If this does not provide for a zero tariff, then check whether a zero tariff preference can be claimed under the EU-UK TCA. To claim the zero tariff under the EU-UK TCA, this requires goods moving from GB to NI to meet UK origin requirements.  Unless goods are wholly obtained in the UK, more complex rules of origin requirements apply as set out in the EU-UK TCA and these will vary depending on the specific product rules. If the zero tariff can be applied under either of these two categories then the goods should be declared as not "at risk" and no EU tariff should apply.
• As a general rule, goods are regarded as of origin to a particular country where;
  • They have been wholly obtained in that country (e.g. plants grown and harvested there, animals born and raised there, raw materials, etc.).
  • They have been produced exclusively from originating materials (e.g. yoghurt produced from EU milk and fruits). There can be different levels of tolerance for non-originating goods.
  • The goods have been produced from materials which do not originate in the country but which were sufficiently processed in that country to attribute origin.
• So for goods that move from GB to NI that have either a zero tariff under the EU CCT, or claim the preferential zero tariff rate under the EU-UK TCA, then it can be declared as not "at risk" and therefore no EU tariff applies.
• Alternatively, if goods that move from GB to NI that do not meet the zero tariff requirements above, can be declared under the UK Trader Scheme as being only used or sold in either NI or GB, then the goods can be declared as not "at risk", irrespective of the origin of the goods.
• A strict application of the Protocol would have meant that all GB and ROW goods moving into NI that are subject to any processing in NI would have been deemed to be "at risk" goods. However, the agreement endorsed on December 17th 2020 means 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.
• So the 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, i.e. 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 additionally, 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 (who are able to carry out any type of processing). However, in this case, the additional "at risk" criteria set out above will also need to be met, so again this is not a blanket derogation for small businesses with turnover below £500,000.

b) What about goods subject to “Commercial Processing” in NI?

• As outlined at the start of this "at risk" section, the Protocol set out a two-stage test, one of which is that for goods to be declared not "at risk" they must not be subject to “commercial processing” in NI.  Essentially this means that all goods imported into NI from GB or ROW that are subject to commercial processing in NI will automatically be classed as "at risk" goods (with the exception of the two categories mentioned above i.e., the non-commercial processing by the approved sectors and processing by businesses with turnover below £500,000).  For all other processors in NI, their goods will be "at risk".
• However, goods being "at risk" does not necessarily mean that an EU tariff will be payable, for example, where the goods are used for commercial processing in NI and at the time of import into NI, either a zero tariff applies under the EU CCT, or where a zero tariff preference can be claimed under the EU-UK TCA (to be reported on the customs import declaration as applicable). In either case an EU tariff would not be payable, even though technically the goods are "at risk". However, it should be remembered that to claim the zero-tariff preference under the EU-UK TCA, the rules of origin conditions will also need to be met.  For example, if goods imported from GB that are to be commercially processed in NI are “wholly obtained” in the UK under the rules of origin criteria, these should not be subject to an EU tariff even where the NI processed goods are sold on into the EU.  However, for processing of goods that are not wholly obtained in the UK and a zero tariff cannot be applied, the EU tariff would apply.
• For those businesses that carry out commercial processing on goods in NI that give rise to an EU tariff payment, these payments 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 still working on the reimbursement scheme and how applications will be submitted and payments made.
• It should also be noted that a business may be eligible to 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 been published on the Gov.uk website setting out the criteria for claiming under the waiver scheme. Whilst this may be of some assistance to some businesses, for large importers the de minimis amount is likely to be exceeded.
• Manufacturing businesses that cannot avail of a zero-tariff on import of goods into NI, may wish to consider using certain customs procedures to mitigate or defer payment of tariffs on "at risk" goods which would otherwise require payment of an EU tariff at the time of import into NI.  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. 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.
• Clearly the "at risk" goods rules will be complex to operate for many businesses and the additional rules of origin criteria set out under the EU-UK TCA will only add to this complexity.

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 2020 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.  NI 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. 

• 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 are 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 UK Government will provide new funding to develop an end to end digital system known as the Movement Assistance Scheme (MAS), to enable agri-food goods that require certain sanitary and phyto-sanitary (SPS) controls and EHCs 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 MAS.

• The EU-UK TCA does not cover the specific new VAT rules that apply to NI.  These rules are covered by the NI Protocol and 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 GB and NI; and the relevant legislation has been included in the Taxation (Post Transition Period) Act 2020.
• Further changes to certain VAT rules 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 services 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 NI businesses to be aware of can be viewed in our recent KPMG VAT article.
• The VAT Policy 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.  This is noted in the December 2020 Command Paper which indicates that the UK Government are looking at ways to deal with the issue, however, as yet the issue is unresolved. 

If you have any queries on how Brexit will affect your business, please get in touch with our dedicated Brexit Response Team.