Forty-second Report of Session 2019–21 Contents

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5Northern Ireland Protocol: application of EU preferential rules of origin24

This Commission Implementing Regulation is legally and politically important because: it applies to Northern Ireland under the Protocol on Ireland/Northern Ireland; it seeks to clarify whether goods imported into Northern Ireland qualify for a preferential (lower) EU tariff under the EU’s trading arrangements with third countries or the (higher) EU Most Favoured Nation (MFN) tariff; it must be read alongside a Decision taken by the Withdrawal Agreement Joint Committee in December 2020 setting out the criteria for determining which goods brought into Northern Ireland are to be considered “at risk” of entering the EU Single Market and subject to EU rather than UK customs duties/tariffs; and it highlights the complexity of the rules applicable to goods brought into Northern Ireland and the difficulties traders are likely to face in interpreting and applying them in practice. Action No further action. The Minister for Trade Policy (Rt Hon. Greg Hands MP) has responded to the questions raised in our earlier Report. We draw his response and our assessment to the attention of the International Trade Committee and the Northern Ireland Affairs Committee.

Overview

5.1This Commission Implementing Regulation (“the Regulation”) seeks to clarify whether goods imported into Northern Ireland from one of the EU’s trading partners qualify for a preferential EU tariff rather than the EU’s standard most favoured nation (MFN) tariff. It is necessary because the Protocol on Ireland/Northern Ireland provides that EU tariffs apply to goods which are considered to be “at risk” of entering the EU Single Market based on criteria which were agreed by the EU/UK Withdrawal Agreement Joint Committee in December.25 Different criteria apply to goods moving from Great Britain to Northern Ireland and from third (non-EU) countries to Northern Ireland. The UK’s Global Tariff applies to goods which are considered “not at risk” of onward movement to the EU. The purpose of the “at risk” criteria is to prevent goods which are intended for the EU market being diverted through Northern Ireland to exploit differences in EU and UK tariffs. We will shortly be publishing a Report on the Decisions agreed by the Joint Committee in December which contains further information and analysis of the “at risk” criteria.

5.2The Regulation itself sets out the steps that need to be taken to prove and verify the origin of goods that are imported into Northern Ireland, as only “at risk” goods that comply with EU rules of origin and the procedural requirements set out in the Regulation qualify for a preferential EU tariff. Our earlier Report (agreed on 10 February) provides a more detailed overview of the interaction between the Regulation, the Northern Ireland Protocol and the Joint Committee Decision establishing the criteria for “not at risk” goods.26

The Government’s position

5.3The Minister for Trade Policy (Rt Hon. Greg Hands MP) confirmed in his Explanatory Memorandum of 13 January 2021 that the Commission Implementing Regulation applies in Northern Ireland (it forms part of the EU customs laws made applicable by the Protocol on Ireland/Northern Ireland) and told us that it simply “reaffirms the rules of origin required for EU trade partners to obtain EU preferential rates for their imports into Northern Ireland”.

5.4We suggested in our letter to the Minister that the brevity of the Regulation belied its complexity and that traders importing goods into Northern Ireland and seeking to determine which tariff to apply might share our concern that the Regulation, read alongside the Joint Committee Decision establishing the criteria for “not at risk” goods, is difficult to understand.27 We asked the Minister to provide further information on:

• the European Commission’s gatekeeper role in determining whether the EU’s preferential tariffs are available for goods imported into Northern Ireland and when they cease to apply; and
• the practical implications of the Regulation for traders bringing goods into Northern Ireland, as well as the impact on supply chains and export patterns.

5.5In his letter of 3 March 2020, the Minister recognises that the Commission Implementing Regulation is “intimately linked” to Joint Committee Decision No 4/2020 on the determination of goods not at risk which also established a new UK Trader Scheme for traders bringing goods into Northern Ireland from Great Britain or from a non-EU third country. The Minister notes that the Scheme “allows authorised businesses to undertake that the goods they are moving into Northern Ireland are ‘not at risk’, and therefore not liable to pay EU tariffs”. He continues:

As a result, it will only be goods destined for the EU, or where there is uncertainty or genuine risk of onward movement into the EU single market, where tariffs will be charged. EU preferences will only be applied to those goods. For goods remaining within the UK customs territory, or traded indirectly with Northern Ireland via Great Britain, traders using the UK Trader Scheme for movements from GB into NI would not need to complete origin certification; and if goods could not qualify for tariff-free trade under a Free Trade Agreement’s Rules of Origin requirements, they could still be traded tariff-free under this deal by those businesses within the Scheme.

5.6The Minister’s response to our questions on the practical implications of the Regulation and the role of the European Commission are set out in an Annex to his letter.

The role of the European Commission

5.7According to the Regulation, only goods from countries which the European Commission considers have taken the necessary measures to comply with EU rules and procedures on preferential origin and are listed on its website can be imported into Northern Ireland using the EU’s tariff preferences. We asked the Minister whether the same listing requirement applied for goods being imported into the EU under the EU’s preferential trading arrangements, how many of the EU’s trading partners had been listed on the Commission’s website so far, and whether some third countries might choose not to be listed because the requirements on proofs of origin and verification of origin were too onerous, given their volume of trade with Northern Ireland.

5.8The Minister confirms that the rules are the same as for goods being imported into the EU. He provides a weblink to the list of third countries which have taken the necessary steps to comply with the EU’s rules of origin requirements and benefit from the EU’s preferential tariffs.28 He says “there is currently no separate list for Northern Ireland”—we are unsure whether he anticipates that there might be one in the future—but considers it unlikely that third countries would choose not to be listed (as the requirements would be the same as for EU countries) and adds that the Department for International Trade “has not received any representations about these requirements”.

5.9We expressed concern in our earlier Report that the Commission would play a gatekeeper role in determining whether the EU’s preferential tariffs should continue to be available for goods brought into Northern Ireland if there was evidence of non-compliance with EU rules on preferential origin. We asked whether the Minister shared our concern, given that the Protocol on Ireland/Northern Ireland makes clear that UK customs authorities are responsible for implementing and applying relevant EU customs law in Northern Ireland.

5.10The Minister confirms that UK customs authorities are responsible for implementation, while adding that “the EU remains responsible for the development and changes to its own tariff policy”. He continues:

Where the EU changes its tariff policy, and the legislative act is within the scope of the Protocol, the UK must be informed through the Joint Consultative Working Group, as provided in Article 15(3)(b) of the Protocol. If this is done via a new act, this needs to be agreed through the Joint Committee as set out in Article 13(4).

The practical implications of the Commission Implementing Regulation

5.11The Commission Implementing Regulation provides that any Northern Ireland content (for example, materials sourced in or processing operations undertaken in Northern Ireland) which is included in goods imported into Northern Ireland from one of the EU’s preferential trade partners will not count as EU content, making it less likely that these goods will satisfy the EU’s rule of origin requirements and qualify for preferential tariffs. We asked what assessment the Government had made of: (i) the product categories or sectors most likely to be affected; (ii) the supply chains that might be interrupted or diverted to exclude Northern Ireland content; and (iii) the economic impact on Northern Ireland businesses and traders.

5.12The Minister says the Government has not received representations from industry on this aspect of the Regulation. He reports that the flow of goods under the Northern Ireland Protocol is “smooth overall and there are no significant queues at NI ports”, adding that the EU and UK co-chairs of the Withdrawal Agreement Joint Committee agreed to intensify the work of the Specialised Committee on the implementation of the Northern Ireland Protocol “in order to address all outstanding issues, with the shared objective to find workable solutions on the ground”.29

5.13In his earlier Explanatory Memorandum, the Minister told us that traders importing goods directly into Northern Ireland from the UK’s continuity trade partners—that is, third countries with whom the UK has concluded trade agreements which broadly replicate those that applied when the UK was a member of the EU—would need to prove that they comply with EU and UK rules of origin. He also indicated that most of the goods brought into Northern Ireland from these trading partners would be considered “at risk” of entering the EU market, based on the criteria established by the Joint Committee in December, and would be subject to the EU’s standard MFN tariff rather than its preferential tariff.

5.14We asked the Minister how likely it was that traders would be willing and able to prove compliance with EU and UK rules of origin and what feedback the Government had received from those affected. Given that he expected most would be charged the EU’s MFN tariff, we also asked why the Government had not yet established a reimbursement scheme for these goods, when it would do so and whether the scheme, once up and running, would reimburse tariffs already paid. We noted that the Minister’s Explanatory Memorandum did not mention Article 2 of the Joint Committee Decision on non-commercial processing and asked him to explain how this condition would apply in establishing whether goods imported into Northern Ireland were to be considered “at risk” of entering the EU market.

5.15The Minister says that traders importing goods from any of the UK’s continuity trade partners “are for the most part” able to prove both EU and UK origin as the terms of the EU and UK agreements are “largely the same”. He continues:

At the moment, traders can use the same form as for the EU except with the wording ‘the United Kingdom in respect of Northern Ireland’ when claiming EU preferences. There has been some engagement in the unusual cases where a good cannot meet the EU preferences as a result of being unable to cumulate UK content in the EU agreement, for example by the South African Customs Union. This is not an issue the other way around as the UK’s continuity agreements make provision for cumulation with the EU.

5.16The Minister reiterates the Government’s commitment to establishing a reimbursement scheme for goods that attract the EU tariff, but can subsequently be shown to have remained in the UK’s customs territory, adding that “further detail will be provided in due course” along with guidance on the GOV.UK website.30 A link to that guidance (once published) will be provided in HMRC’s ‘not at risk’ guidance. The Minister says that the current ‘not at risk’ guidance “sets out clearly what conditions apply for commercial processing and in what cases goods subject to processing can apply to the UK Trader Scheme”.

5.17The Minister indicated in his Explanatory Memorandum that implementation of the Regulation was unlikely to be onerous in practice as traders would already have most of the information required and that any administrative changes would be “very minor”, while citing the EU-Turkey Trade Agreement as one of “a few exceptions”. We requested further information on the exceptions and how they would affect traders importing goods into Northern Ireland.

5.18In his response, the Minister says that “Turkey is currently the only exception we are aware of” but that “the number of exceptions may increase, for example if the UK and EU both sign trade agreements with a partner in the future”.

5.19We envisaged that there might be circumstances in which goods imported into Northern Ireland did not qualify for a preferential EU tariff under the Regulation or for a UK preferential tariff (because, for example, the goods failed to satisfy EU and UK rules of origin). We asked the Minister to explain how the “at risk” criteria set out in the Joint Committee Decision would apply, given our understanding that the UK’s MFN tariff was generally lower than the EU’s MFN tariff and that a lower UK tariff might make it more likely that the goods would be considered “at risk” and charged the EU tariff.

5.20In his response, the Minister explains that the applicable tariff will depend, first, on whether a trader importing goods into Northern Ireland is participating in the UK Trader Scheme and, second, whether the goods in question are brought into Northern Ireland from elsewhere in the UK or from a non-EU third country. Goods brought into Northern Ireland from Great Britain by a trader authorised under the UK Trader Scheme are considered “not at risk” and do not need to meet rules of origin requirements. By contrast, goods brought into Northern Ireland from a non-EU third country are ‘at risk’ and the EU tariff will apply, even if the trader is authorised under the UK Trader Scheme, if the difference between the applicable EU and UK tariff is lower than three per cent of the customs value of the good. The Minister adds:

In the case you mention, if the UK’s MFN is lower than the EU’s by 3% points or more then the goods would be considered ‘at risk’ and the EU MFN would apply. The differential is calculated on the basis of the applied tariffs, so would include any applicable preferences to determine the rate for either the EU or UK before calculating the differential between the two rates.

5.21Finally, we asked the Minister to point us to the relevant gov.uk guidance explaining how the Commission Implementing Regulation, read alongside the Joint Committee Decision on at risk goods, would work in practice. We also asked whether systems had been put in place to monitor the take-up of EU preferences under the Commission Implementing Regulation and its impact on businesses importing goods into Northern Ireland.

5.22The Minister directs us to Government guidance on declaring goods brought into Northern Ireland not ‘at risk’ of moving to the EU and to Government guidance on rules of origin and claiming preferential tariffs.31 He says that HMRC will continue to monitor the movement of goods into Northern Ireland.

Our assessment

5.23Informed by the Minister’s response and our own understanding of the Commission Implementing Regulation, the Northern Ireland Protocol and Joint Committee Decision 4/2020, we make the following observations.

The role of the European Commission

5.24We are satisfied that the EU’s preferential rules of origin apply in the same way for goods brought into Northern Ireland as they do for goods imported by EU Member States. This means, however, that the European Commission is the body responsible for determining whether the EU’s preferential tariffs are available for goods brought into Northern Ireland as well as for determining whether they should be suspended and when they should be restored if there is evidence of fraud or non-compliance in the countries benefiting from the preferences.

The impact on businesses in Northern Ireland

5.25The Minister says that industry has not voiced any concerns about Article 2 of the Commission Implementing Regulation on cumulation of content. Article 2 provides that any Northern Ireland content (for example, materials sourced in or processing operations undertaken in Northern Ireland) which is included in goods imported into Northern Ireland from one of the EU’s preferential trade partners does not count as EU content, thus making it less likely that these goods will qualify for the EU’s preferential tariffs. He also observes that “the flow of goods under the Northern Ireland Protocol is smooth overall”.

5.26We consider that the Minister’s response misses the point of our question. We would not expect the Regulation to have any significant impact on the overall flow of goods. It could, however, affect specific products or sectors of the economy or established supply chains which would not necessarily be captured in general data on trade flows. We still do not have a clear idea whether the non-cumulation of Northern Ireland content has had (or may yet have) an impact in specific sectors or supply chains. We accept that the absence of representations from industry may be a positive sign. Equally, it may signify difficulties in understanding and applying a set of highly complex rules.

“At risk” goods

5.27The Minister acknowledges that most goods entering Northern Ireland from a country with which the UK has concluded a continuity trade agreement and which comply with the UK’s rule of origin requirements but not the EU’s will be considered “at risk” and will be charged the EU’s MFN tariff (not a preferential tariff), making it all the more important that the Government’s reimbursement scheme for “at risk” goods which remain within UK customs territory is made operational as soon as possible. The Minister gives no indication of an expected date, creating further uncertainty for traders who may depend on the scheme to recover additional costs incurred under the Northern Ireland Protocol.

The UK Trader Scheme

5.28The Minister underlines the importance of the UK Trader Scheme in enabling traders moving goods into Northern Ireland from Great Britain or from a non-EU third country to establish that their goods are “not at risk” and are not subject to EU tariffs. It is unfortunate that he does not provide data to show how many of these (potentially eligible) traders have applied for and obtained authorisation under the Scheme and how many have chosen not to do so or have had their applications rejected.

Exceptions

5.29The Minister told us that proving compliance with EU and UK rules of origin would involve “very minor administrative change” for most traders, but cited imports under the UK-Turkey Agreement as an exception. It seems that further exceptions are possible but the Minister does not explain how these exceptions would affect the administrative burden on businesses.

Take-up of EU preferences

5.30The Minister says that HMRC will continue to monitor the movement of goods into Northern Ireland. He does not provide the assurance we sought that the Government will also monitor the take-up of EU preferences for goods brought into Northern Ireland—while this may not directly affect the flow of goods, it may affect the costs of doing business in Northern Ireland.

Changes to EU rules of origin and preferential tariffs

5.31While UK customs authorities are responsible for implementing EU customs laws under the Northern Ireland Protocol, the Minister confirms that the EU is responsible for developments and changes to its tariff policy. He says that the UK must be informed of these changes if they are within the scope of the Protocol. Nonetheless, as a third country the UK will have limited means for influencing the development of the EU’s tariff policy, even though changes made to it will apply in Northern Ireland. We set out (in the following bullet points) the relevant procedures under the Protocol:

• The EU must inform the UK through the Joint Consultative Working Group (established under the Northern Ireland Protocol) of “planned” EU acts which are within the scope of the Protocol. This would include new EU acts concerning preferential tariffs and rules of origin, as well as EU acts amending or replacing existing rules which already apply under the Northern Ireland Protocol.
• The UK would have no formal say over EU acts amending or replacing the EU’s existing preferential rules of origin—they would apply automatically in Northern Ireland once adopted by the EU.
• The EU must inform the UK, through the EU/UK Joint Committee, of the adoption any new EU acts that are “within the scope” of the Protocol. These new acts will only apply in Northern Ireland if the UK agrees to add them to the EU laws listed in the Annexes to the Northern Ireland Protocol. If the UK does not agree and no other solution can be found within the Joint Committee, the EU may take “appropriate remedial measures”.

Action

5.32We have no further questions to raise on the Commission Implementing Regulation. We draw the latest correspondence with the Minister and our assessment to the attention of the International Trade Committee and the Northern Ireland Affairs Committee.