What is the current status? For the first time in three years the UK Parliament voted for a Brexit deal. This was the latest deal Prime Minister Johnson recently concluded with the European Union (EU). Unfortunately for the British government, the plan to navigate the entire Brexit process through Parliament in three days was torpedoed by that same Parliament (322 votes against and 308 in favor). Parliament wanted more time to study the new Brexit deal and to table any amendments to it.
EU grants delay until January 31, 2020
In view of the above, it has become impossible for the United Kingdom (UK) to leave the EU with a deal this week on October 31. It will simply take more time to reach an agreement. Parliament forced Boris Johnson to request a Brexit delay from the EU. That is why this week (28 October) the EU granted an extension until January 31, 2020.
Will there now be a deal in the short term?
That is by no means certain. Although 30 more British MPs voted in favor, only now do members of parliament have the opportunity to table amendments. Some of these 30 - mainly from the opposition - had already indicated that they would only vote in favor of the deal if substantial changes were made.
This week the UK Parliament voted for new elections on December 12, 2019 after the opposition Labour party agreed to an election. Boris Johnson hopes he will win these elections so he can finally get the Brexit done.
The consequences of ‘No deal’ have received more than enough attention lately and we will be brief about this. The sharpest edges have now been removed from a ‘No deal’. However, a ‘no deal’ will have serious consequences and could lead to a contraction of the economy in both the UK and in the EU. The effects will not be equally visible in every country, but they certainly will be in the Netherlands.
What does this deal actually mean and what will happen on Brexit day?
To start with the latter, nothing at all for the time being. This is because everything will remain the same, since a transitional phase, lasting until January 1, 2021, will come into effect immediately after the UK’s withdrawal. This transitional phase may be extended by a maximum of two years until January 1, 2023. This period is necessary for the UK and the EU to conclude a new trade agreement. This transition period was already included in the deal that the previous UK Prime Minister, Theresa May, had concluded. Incidentally, this deal has remained largely intact. Significant changes have been introduced, particularly with regard to Northern Ireland.
If an agreement is not concluded in time, the Ireland/Northern Ireland protocol will enter into force. Northern Ireland would then be part of the UK customs territory, but would follow the rules of the EU’s internal market (for example, all veterinary and phytosanitary measures, CE marking obligations, REACH regulations, etc.). The rules on VAT and excise duty will also continue to apply in Northern Ireland and the European Court of Justice will continue to play a role in the protocol. The various parties have agreed to this protocol as only 1% of UK-EU trade passes through Northern Ireland.
The Northern Ireland Assembly can decide every four years whether this special status for Northern Ireland is still necessary. If this protocol is no longer required, the shifted border control will be moved back to the Northern Irish/Irish border. This is not explicitly stated in the protocol, but seems to us to be the only realistic option.
When this protocol enters into force, border controls in Northern Ireland will take place at airports or seaports and the applicable (UK or EU) customs duties will then be determined.
EU customs duties
Goods coming directly from the UK and destined for Northern Ireland will not be subject to customs duties. If the goods are from anywhere else and it is not certain that the final destination is Northern Ireland, the customs duties applicable in the EU will be levied by the UK and paid to Brussels. If it subsequently transpires that the goods will remain in Northern Ireland, these duties will be reclaimed. It is not yet clear what the deadlines for reclaiming unduly levied EU customs duties will be. Exactly how all this is going to work will also be elaborated in more detail.
No monitoring of goods
Anyway, here is an initial prediction. Once goods are released for free circulation – either in the UK or in the EU – they are no longer subject to any form of monitoring. This allows goods to be resold without the knowledge of customs or any other authority. After all, imported goods can be traded in the same way as goods originating in Northern Ireland. Goods can be resold and the information about this does not have to be shared with the government. If this is not monitored in some way, a gap will be created in the EU’s external border.
Free trade agreement
Suppose the UK concludes a free trade agreement with the United States of America (the fervent wish of the Brexiteers) and the EU does not have a free trade agreement with that country. A standard chemical product is subsequently sold from the US to a buyer in Northern Ireland, which uses this in its production. As a result of the free trade agreement with the United States, this product is subject to 0% customs duties in the United Kingdom, while the EU levies 5% for this product from the United States. Since the goods are destined for the Northern Ireland business, the UK customs duties of 0% apply here. Over time, for example a year later, the Northern Ireland business sells the product to another Northern Ireland business, which in turn resells it to a customer in Ireland or elsewhere in the EU. How can the EU ensure that the loss of 5% customs duties is still levied?
Increased burden for businesses in Northern Ireland
The only possibility we foresee is that the business sector in Northern Ireland will have to keep track of all this data itself: a considerable burden for businesses there. We wonder whether many of them realize this. However, how long must a product that was unequivocally intended for a Northern Ireland business remain in Northern Ireland and enter into free circulation before it can be sold to a business in Ireland without any restriction? Is that a day, a month, a year, three years, ten years or maybe never? At the moment, we have no idea. This Ireland/Northern Ireland protocol will certainly lead to an increased financial burden for businesses in Northern Ireland. The rest of the UK may also be affected because when ‘exporting’ to Northern Ireland the UK has to prove that the goods originated in the UK in order to ‘import’ into Northern Ireland without import duties. This will also lead to more litigation for the government. This additional financial burden will be detrimental to the business climate in Northern Ireland.
Wait and see again
The deal that former UK Prime Minister Theresa May made with the EU remains largely untouched. Boris Johnson has removed the backstop from the divorce agreement. He has been able to insist that Northern Ireland belongs to the UK Customs Union, has agreed to allow the European Court of Justice to play a significant role in Northern Ireland, and has agreed that the rules of the EU internal market will apply – for as long as necessary – to Northern Ireland. It thus appears that the UK will not have to pay a contribution to the EU, while countries like Switzerland and Norway do. It is now once again a matter of waiting to see what actually happens with this Brexit deal...
Would you like to know more about the consequences of Brexit for your business? We have developed five specific products to help your organization. See the folder. Feel free to contact our specialists from the Brexit taskforce (in Dutch) or your regular advisor within KPMG Meijburg & Co or KPMG.
For more informatie regarding Brexit click on this link (in Dutch).