Market leading insight for tax experts
View online issue

Revised Brexit deal: changes and risks

printer Mail
Speed read
The new Withdrawal Agreement and non-binding post-Brexit Political Declaration are designed to secure an orderly Brexit this month. The controversial backstop is replaced by a proposed new status for Northern Ireland, which ties it into the EU customs and single market rules. The agreement is open to Parliamentary amendment following the triggering of the Benn Act and Letwin amendment. But as it stands, the deal is a much looser affiliation to the EU than envisaged by Theresa May. The administrative burden on HMRC and business alike should not be underestimated.

On 17 October, the metaphoric white smoke plumed from the Brexit negotiations as a new deal materialised. There were no changes to many of the big-ticket issues in the binding Withdrawal Agreement (WA) and non-binding post-Brexit Political Declaration (PD). This included no movement on the exit bill and citizen’s rights.

However, the small number of clause changes to the thrice-rejected Theresa May WA belied a massive UK shift on Northern Ireland and future trade relations:

  • The 2021 backstop EU customs union (CU) insurance policy was removed from the WA.
  • It was replaced by a dual Northern Ireland customs, VAT and regulatory status from 2021. After this date, there will effectively be a border for these regimes between Great Britain (GB) and Northern Ireland (NI) in the Irish Sea.
  • The DUP veto proposal on the NI measures was removed in favour of a ‘mutual consent’ simple majority vote at the NI National Assembly every four years.
  • The transition period to 31 December 2020 remains, and the UK will continue to apply EU law until then. But it may now result in a new December 2020 Brexit no-deal cliff edge if no free trade agreement (FTA) on the future UK/EU relations is completed. In this case, the GB (not NI) will revert to WTO terms with the EU. There is an option to extend the transition period out to the end of 2022. But the UK must apply for this by 1 July 2020.
  • There was a ‘kicking of the can down the road’ for the ‘level playing field’ provisions, including workers’ rights and state aid competition. They were shifted from the binding WA to the non-binding, aspirational PD. The level playing field issues will now be negotiated after Brexit in a future FTA.

Next steps: risk of a further postponement as no-deal prospects dwindle

The UK parliament must now ratify the WA and PD by 31 October to secure an orderly Brexit as planned. Ratification by the EU includes a consent motion by the EU Parliament, and final approval by the Council of the EU. Many hazards lie ahead for this strategy following the 19 October triggering of the ‘Benn Act’ request, sustained by the ‘Letwin amendment’, to the EU for a further Brexit extension. If the Bill does not pass or is subject to major parliamentary amendments requiring EU agreement, and there is a third delay to Brexit, then a general election or second referendum loom.

The changes and new burdens for business and HMRC

Below is a summary of the main changes in the new Brexit proposal. There are many risks and open-ended questions associated with them, including:

  • businesses facing the loss of frictionless trade;
  • traders having to track and comply with a NI dual customs and VAT regime;
  • HMRC being tasked with designing and implementing the NI systems within 14 months;
  • companies having to follow proof-of-origin rules for NI-destined deliveries; and
  • last but by no mean least, the prospect of a new no-deal Brexit, this time on 31 December 2020, embedded in the revised WA if no agreement on a new FTA is reached within the next year.

Removing the backstop

Theresa May’s backstop clause agreed with the EU sought to avoid physical checks at the NI border. This envisaged a transition period until 31 December 2020, when the UK would remain within the CU whilst a new FTA was negotiated. If no deal could be found which prevented border checks, then the UK would have remained within the CU until a mutually acceptable border solution could be found. This was viewed by Leave supporters as the worst of all post-Brexit worlds: trapping the UK within the EU without a voice on the rules and thwarting it from negotiating FTA deals around the world.

The UK government has now secured the removal of the backstop to be replaced by a new status for Northern Ireland.

Northern Ireland’s dual customs, VAT and regulatory status

The new protocol proposes that NI will have an innovative economic status for customs, VAT and regulation of goods to avoid any physical border with Ireland. NI will remain within the rest of the UK (Great Britain, ‘GB’, which excludes NI) for these rules. However, NI will also administer the EU rules on behalf of the EU for goods passing between NI and Ireland.

The details across the three areas are as follows.


  • NI will remain within the UK customs union.
  • However, it will apply the EU customs code on goods entering from outside of the EU (including the UK) to Ireland. This involves NI entry ports officials administering EU customs processes and tariff collections.
  • The default position would be that goods coming into NI from GB will be liable to EU tariffs.
  • Only if it can be demonstrated that the final customer for the goods is resident in NI will the goods be subject to UK tariffs.
  • If EU tariffs are collected at the NI ports, but the goods eventually are sold to a NI customer, then the importer would be able to apply for a tariff refund on any difference. This would ensure NI businesses would be able to enjoy the benefits of future lower tariff rates agreed by the UK with other countries.
  • Duties collected will be remitted to the EU.
  • Goods shipped between Ireland and Northern Ireland would pay no tariffs at the border, and there would be no customs checks.
  • Certain goods destined for Ireland will be exempted entirely from EU tariffs if they are determined as low risk. A new Joint Committee will be responsible for determining which goods are entitled to this status.
  • Import and export declarations will be required on all goods moving between GB and NI to support the above procedures.
  • Personal goods will be exempted from tariffs.
  • Questions on state-aid limits to the UK, effectively subsidising businesses by settling EU duties, will need to be addressed and resolved.

VAT and excise:

  • NI will remain part of the UK VAT and excise areas.
  • However, it will continue to be subject to the EU VAT Directive, including the rulings of the CJEU, for goods passing from outside the EU, including GB, to Ireland. This includes collecting import VAT at the NI ports on affected goods. This VAT will not be remitted to the EU.
  • Goods moving from Northern Ireland to Ireland will still be considered as intra-community supplies, and therefore not subject to import VAT. Businesses responsible for the intra-community supply will be required to complete current intrastat and EC sales (for goods) filings.
  • The UK may decide to align reduced VAT rates and exemptions applicable in NI with those of Ireland. The aim is to prevent distortions of markets across the border. A key area will be tourism services where Ireland has a 13% reduced VAT rate.
  • However, NI could not benefit from any GB exemptions or reduced rates introduced, e.g. VAT on women’s sanitary products or on heating fuel.
  • Businesses will face complex VAT and excise rate tracking requirements.
  • The NI VAT measure does not apply to services. However, many industrial supplies include a service support element. This will provide a complex burden on businesses to understand the services-only component of their supplies so as to apply UK VAT rules and rates.

Single market regulatory alignment:

  • NI will remain within the EU single market to avoid the need for product standard and safety checks on the border with Ireland.
  • NI goods will maintain regulatory alignment with the EU. This will be on the basis of a ‘limited set of rules’ on goods, agricultural supplies, food and manufactured products. Services are excluded.
  • Goods moving from between GB and NI would face regulatory checks by UK officials at the NI ports. The EU may request for their officials to be present.
  • There would be no regulatory checks on goods (including food and livestock checks) moving from NI to the rest of the UK.

The logistics challenges for HMRC for the above dual regime will be a considerable challenge. Back in 2018, when Theresa May’s ‘Chequers deal’ proposed a UK-wide CU administration arrangement, the chief executive of the HMRC, Jon Thompson, suggested an implementation period of five to seven years. And HMRC would be simultaneously conceiving the new post-Brexit reporting systems for the rest of the UK. That is quite a workload.

Consent on NI arrangements

The NI measures come into automatic effect on 1 January 2021. NI’s Assembly will vote on whether to continue the measures four years later at the end of 2025. This is a switch to ‘mutual consent’ from the effective DUP veto contained within the first Johnson government proposal from the start of October.

In the case of a rejection, the measures will only be withdrawn after two years. This means the measure will remain in place until at least the end of 2026.

The Assembly may then vote every four years on continuing the measures. There is an option for the Assembly to extend this to eight years.

Transition period: a new no-deal cliff edge, December 2020

If the WA is agreed, the transition period deadline remains 31 December 2020. Until then, the UK will continue to apply EU law as if it were a member state. But the UK will leave the political and institutional structures of the EU and will have no representation or say in decision making. The UK will remain subject to CJEU, including its interpretation of the WA.

What has changed from the Theresa May WA is that the UK’s default position will be a ‘hard Brexit’ on 31 December 2020. The UK will revert to World Trade Organisation terms, and most favoured nation status duties rates. This can only be averted if the UK and EU have agreed an FTA governing customs, VAT and other exit issues. This means if the WA passes, the UK could be refacing a no-deal Brexit scenario, with the stockpiling and other preparations, at the end of 2020. Alternatively, the UK may request a further two-year implementation period until December 2022. Importantly, the UK must decide on requesting this further extension by 1 July 2020.

‘Level playing field’ kicked down the road

The level playing field provisions have been swapped out of the legally binding WA into the non-binding PD. The provisions committed the UK to not undermining the EU on policies including: state aid, competition, climate change, environment, social, and employment standards.

The PD states the aims of both parties on this matter when they come to negotiate a further FTA. The EU conceded this change since it will be able to fully negotiate them as part of a full goods and services trade agreement.

Where does this leave us?

The new WA and PD are undoubtably shrewd, compromising politics in terms of securing the government’s aim of an orderly Brexit this month. NI, instead of the whole UK, has been tied into the EU customs and single market rules to sidestep the physical NI border checks blocker that has prevented agreement for over three years.

But with the triggering of the Benn Act and Letwin amendment, the provisions of the WA lie open to amendments in the next week. A likely strong contender is reverting to membership of the CU for all the UK. UK and EU ratification of that would be impossible by 31 October. In which case, we will all be back on the Brexit roundabout for months ahead.

But the new deal has shown the likely landing ground of Brexit: it is a much looser affiliation to the EU than envisaged by Theresa May. Wish HMRC and business well with managing the multitude of new regimes it creates.