• Accessibility
• Email alerts
• RSS feeds
• Contact us

Eleventh Report of Session 2019–21 Contents

---

6COVID-19: Delay in implementation of new EU tax legislation33

These EU documents are legally and politically important because: they contain draft legislation to delay, in view of the coronavirus crisis, the implementation of a number of new EU tax rules (in particular in relation to the VAT treatment of online shopping). Although some of the EU laws affected by the postponement are due to be applied in Northern Ireland under the terms of the Irish Protocol in the Withdrawal Agreement, the Government appears not to have consulted the Northern Ireland Executive on the proposals. Action Report these developments to the House and draw them to the attention of the Business, Energy & Industrial Strategy Committee, the Treasury Committee and the Northern Ireland Affairs Committee, given the implications of the Commission’s draft legislation under the Protocol.

Overview

6.1The COVID-19 pandemic has had a significant impact on the capacity of public authorities in the UK and elsewhere, necessitating the diversion of resources away from planned activities to crisis response. It has, by extension, also had an impact on the ability of Governments and regulators to implement new legislation planned before the magnitude of the crisis became apparent. The implications of the pandemic for the implementation timetable of new regulatory initiatives are also recognised at the European level.

6.2On 8 May 2020, the European Commission therefore proposed the postponement of two new EU policy tax law initiatives, some of which will be applicable in Northern Ireland under the Protocol on Ireland/Northern Ireland in the Withdrawal Agreement. We have set out the detail of the planned legislative delays below.

The VAT e-commerce package

6.3The first proposal to delay planned implementation of new EU tax legislation34 relates to the new arrangements for the VAT treatment of distance sales of goods by a business in one EU country to a customer in another (the “e-commerce package”).

6.4Notably, these amendments will delay the entry into force of the new “One Stop Shop” (OSS) mechanism,35 which will allow businesses with a VAT registration in any EU country to account for VAT on distance (online) consumer purchases of services, as well as of goods worth €150 (£135) or less, throughout the EU with their domestic tax authority. The latter then remits the revenue to its relevant counterparts in other Member States.36 This new system, which in essence removes the need for companies to adhere to different sets of VAT rules for most consumer sales to other EU countries, is now due to take effect from 1 July 2021, rather than 1 January 2021 as originally planned. Similarly, the abolition of “Low Value Consignment Relief” — the current arrangement which means goods imported from outside the EU which are priced at less than €22 (or €10 in some Member States) are exempt from import VAT — will also be pushed back by six months.37

6.5Our predecessors last considered the substance of these policy changes in their Report of 30 January 2019. Since then, the UK has of course left the European Union (although Article 127 of the Withdrawal Agreement applies EU law to the UK as if still a Member State during a post-Brexit transition period until 31 December 2020.)38 Moreover, the Withdrawal Agreement setting out the terms of the UK’s withdrawal from the EU contains a “Protocol on Ireland and Northern Ireland” which will, among other things, require the UK to continue applying EU VAT law “concerning goods” in Northern Ireland beyond the end of the post-Brexit transition period (as part of a wider arrangement to keep the land border on the island of Ireland free of regulatory and customs infrastructure). As such, the Commission proposals will also provide additional time for the implementation of these new rules in Northern Ireland.39

Exchange of information on cross-border tax avoidance schemes

6.6Secondly, the Commission decided to propose deferring certain deadlines under the latest iteration of the EU’s Directive on Administrative Cooperation (DAC) on tax matters.

6.7More specifically, under amendments to that Directive agreed in 2018,40 certain “intermediaries” within the EU — service providers like tax advisors and consultants — are required to report potentially aggressive cross-border tax planning arrangements for their clients — i.e. tax avoidance schemes — to their national authorities.41 This information is then to be shared automatically with the Governments of all other EU Member States. Separately, since 2016 the EU’s national Governments exchanged information reported to them by banks and other financial institutions on financial accounts held in one EU jurisdiction, but whose beneficiary is resident for tax purposes in another Member State.42

6.8Under the Directive, the above information on financial accounts normally has to be filed by banks at the end of September each year.43 The new reporting requirement on cross-border tax schemes was due to take effect for the first time on 1 July 2020. In light of the coronavirus crisis, the European Commission has now proposed to give the private sector companies44 more time to submit the information to the relevant regulators.45 Consequently, the first automatic exchange of information on avoidance schemes under the Directive between EU tax authorities “shall be communicated by 31 January 2021”. The Commission could defer these implementation deadlines for another period of up to three additional months by means of a Delegated Act — EU secondary legislation– if considered necessary because of the coronavirus crisis.46

6.9The Government has been participating in the EU’s exchange of information relating to financial accounts since it was introduced when the UK was still a Member State in 2016. The arrangements on intra-EU data sharing in relation to cross-border tax avoidance schemes are completely new, and would have taken effect approximately halfway through the post-Brexit transition period (therefore requiring the Government to implement them in full). The European Commission’s proposed delay essentially takes the UK out of this scheme altogether, since the transition is due to end on 31 December 2020 and the first information obtained is only due to be exchanged between tax authorities “by 31 January 2021”. While the Government has transferred the reporting obligations under the DAC into domestic law by means of the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, the UK will from the end of transition no longer be required to share the information it has obtained automatically with the EU’s Member States (and vice versa).

6.10The Directive on Administrative Cooperation will not apply to or in Northern Ireland under the Protocol in the Withdrawal Agreement. While the EU has proposed that both sides commit to maintaining the sharing of information between tax authorities as set out in the DAC under the new UK-EU economic relationship,47 including on financial accounts and cross-border tax schemes, the Government appears to have rejected any such constraints on the UK’s autonomy to determine its own approach to this matter more flexibly.

The Government’s position

6.11The Financial Secretary to the Treasury (Rt Hon. Jesse Norman MP) submitted Explanatory Memoranda on the European Commission proposals relating to the delay of the VAT e-commerce package and the Directive on Administrative Cooperation in tax matters at the end of May 2020.

6.12With respect to the VAT e-commerce package, the Minister acknowledges that “the amendments […] will fall under the provisions of the Northern Ireland Protocol”. However, he makes no assessment of the UK’s readiness to implement these rules under the Protocol (and therefore, by extension, of the benefits of the proposed delay); likewise, he does not refer to any potential implications of these EU rules acting as a barrier to trade between Great Britain and Northern Ireland.48 The Minister also claims that “the Government recently set out its wider position on VAT and the Protocol in the [Command] Paper, ‘The UK’s approach to the Northern Ireland Protocol‘”. Incongruously, the Minister also says in his Explanatory Memorandum that “VAT policy is a reserved matter under the UK’s devolution settlements and no devolved administration interests arise”, and therefore the Northern Ireland Executive has “not been consulted” on the Government’s position on the proposals to delay the new EU VAT rules.

6.13As regards the delay in transposition of the new Directive on Administrative Cooperation in relation to tax avoidance schemes, the Minister welcomes the Commission’s proposal as “a sensible and proportionate measure […] given the degree of uncertainty around the duration of the impacts of the Covid19 pandemic”. He does not comment on the inclusion, or lack thereof, of any structured exchange of information on the tax matters covered by the DAC under the future UK-EU relationship.

Action

6.14The previous European Scrutiny Committee has already reported the substance the EU tax legislation for which delays are now proposed to the House, in its Reports of 7 March 2018 and 30 January 2019 respectively.

6.15As the Commission’s recent COVID-related proposals would not make any substantive changes to them, we do not revisit those earlier assessments. However, there are implications for the UK. The key consequences of the delayed application dates are, first, that the UK will have more time to apply the new VAT rules for goods bought online in Northern Ireland, and secondly that — by pushing the relevant deadline beyond the end of the post-Brexit transition period — it will effectively lift the requirement on the Government to exchange information with its counterparts in the EU on information filed by British tax advisors on cross-border tax arrangements.

6.16In addition, the Committee wishes to place on the record its disagreement with the Minister’s assertion that the Government has “set out its wider position on VAT and the [Northern Ireland] Protocol”. The Command Paper he cites did not in fact provide any detail about the practical scope or implementation of this aspect of the Protocol, for example on the specifics of the hybrid VAT rules that will apply in Northern Ireland (with VAT laws on goods set by the EU and those relating to services determined by the UK). Nor did it provide answers to any of the detailed questions put to the Financial Secretary by the Committee about this broader issue separately on 14 May 2020, and to which it is still awaiting a reply. It will continue to press the Government for clarity on the practical consequences of the VAT provisions of the Protocol for Northern Ireland, and the UK as a whole. It also urges the Government to consult the devolved authorities in Belfast on the UK’s approach to any pending and future EU proposals relating to Value Added Tax that will, or may, be relevant to Northern Ireland under the Protocol.

6.17We draw these developments to the attention of the Business, Energy & Industrial Strategy Committee, the Treasury Committee and the Northern Ireland Affairs Committee, given the implications of the Commission’s draft legislation under the Protocol.

---

• A-Z index
• Glossary
• Contact us
• Freedom of Information
• Jobs
• Using this website
• Copyright