Dylan J. Wilkinson (QUB)
Much of the academic and media focus on Brexit, perhaps reasonably, centralises on its short-term effects. Seldom does consideration extend beyond this. However, a lingering question is what will the perception of Brexit be in the distant future? How will Brexit be explained and taught in the decades to come? What will the key questions and points of knowledge be?
I often ruminate on the perception of Northern Ireland’s role in Brexit. From the perspective of both main parties, the UK and the EU, what is the role of Northern Ireland? Further, I believe a key question is: throughout Brexit, has Northern Ireland been prioritized, or utilized? I postulate this question as NI has had a cloudy perception throughout the Brexit process.
While assurances have frequently been given, the importance of NI to both parties has also been questioned: most flagrantly in 2019 when the UK Government considered amending the Good Friday Agreement to fix the backstop issue and recently, when the UK Internal Market Bill considered amending the Ireland/Northern Ireland Protocol (The Protocol). A subtext to Brexit is that much of the complexity surrounding Brexit arises from the unique interconnectedness of NI between Ireland and the UK. To propose that meeting the unique requirements of NI requires a fine balance is an understatement.
In this vein, it might be tempting for both parties to overlook the precise and complex needs of NI in pursuit of the ‘bigger picture’: improved (or at least, not impoverished) UK-EU relations and ‘workable’ arrangements for NI? However, would this truly be prioritising the requirements of NI, a member of the UK? The question of prioritization, or utilization, is large and multi-faceted. However, NI’s post-Brexit trading arrangements may be a useful place to start.
A pretext is useful. Both the EU and UK were faced with the herculean task of negotiating the Irish Border (‘the Border’) whose political, constitutional and legal sensitivity on the island of Ireland cannot be understated. The crux of the issue was: implement a hard border in NI, which would be standard from a trade and customs perspective in this context, but potentially cause tension in NI’s unique political circumstances. Or, avoid the implementation of a hard border to avoid this tension and (essentially) create an arrangement by which customs can administered at the border.
The latter was chosen, and a both complicated and unprecedented trade framework is outlined for NI in the Protocol. Predictably, the customs arrangements command much of the attention as Article 6 provides a complex ‘hybrid’ customs scenario for NI, of which many details remain outstanding. Thus, a major focus is placed on filling these gaps. However, NI’s customs arrangements, though important, are not the only indirect implications arising from the Protocol.
NI’s VAT arrangements are an also problematic, less explored implication of the Protocol. A reduction in friction at the border on customs also extends to VAT. Article 8 of the Protocol provides that NI will remain subject to EU VAT law on goods. Therefore, the Protocol observes an arrangement where goods will travel from the EU to a third country with no change in VAT treatment for goods: essentially, a porous border. Consequently, a prevailing question is, if NI remains under the regulatory orbit of the VAT system for goods – to reduce friction between ROI and NI – what implications does this create for cross border VAT fraud?
Prior to exiting the Protocol, it was believed that the entire UK (GB and NI) would leave the Single Market, Customs Union and EU VAT area and subsequently, that this would minimise the damage from VAT fraud. This idea, however, dissipated when the complexity of the border was finally understood and the hybrid arrangements in the Protocol emerged.
Criminality at the border was always expected to increase, post-Brexit. However, VAT fraud can become highly complex and as such, should be considered more serious. It has a number of depths beginning at the more simple, domestic VAT fraud. This occurs where a trader fraudulently manipulates transaction records to overclaim VAT repayments. This is due to the decentralized nature of VAT accounting, where a credit-invoice system is used to administer VAT. This method of VAT fraud is particularly effective when employed across borders and is considered to be hardest to prevent in the EU VAT system. This is the system NI remains connected to as it will apply EU VAT law.
Carousel Fraud is a strain of Missing Trader Intra-Community (MTIC) that abuses legal and interjurisdictional complexity within the EU VAT system. It is highly complex and involves one, or multiple, traders creating voluminous fraudulent supply chains involving numerous member states. It is particularly effective in the EU as the EU VAT system has an important role within the European integration process: to observe the reduction of fiscal, administrative and physical borders.
The compounding effect of reducing barriers to integration while maintaining complex VAT laws has enabled fraudsters to manipulate the VAT system. The prominence of Carousel Fraud in the EU has made a significant contribution to the loss of revenue in the EU, with a gap in VAT revenue of €140 billion in 2018.
In continuing to apply EU VAT law, NI remains within the remit of carousel fraud and the implications therein. Therefore, the pertinent question for NI is not only to what extent remaining under the operation of EU VAT law will increase VAT fraud, but how this might be compounded by additional complexities within NI, such as operating its own highly complex VAT regime and its post-Brexit relationship with the UK.
It will be interesting to observe how the proliferation of VAT fraud in NI contributes to the overall picture of NI in a post-Brexit context. What will this picture look like when the carpet is lifted on all implications, and benefits, that arise when NI post-Brexit is laid bare?
At present, the proliferation of VAT fraud in NI, post-Brexit, is yet to be discussed at length. I will discuss these questions in an upcoming paper, entitled “Lifting the carpet: The Protocol and cross-border VAT fraud.”
Dylan J. Wilkinson is a Ph.D Candidate in the School of Law, Queen’s University Belfast and former Indirect Tax Associate of Deloitte Ireland.