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UK Northern Ireland uncertainty in energy VAT rate cut

Doubts over post-Brexit Northern Ireland position if UK decides to cut VAT rate on energy or petrol

Questions as to the VAT position of Northern Ireland (NI) following Brexit have arisen as the UK debate on a domestic energy or petrol VAT rate cut stirs.  Energy inflation in the UK hit 23% in January. Many European energy VAT rates have been cut to help soften the blow.

Currently, UK VAT on domestic energy is 5%. This is the minimum limit set by the EU’s VAT Directive Annex II positive list. UK petrol and diesel are set at the standard rate of 20%. If the UK were to cut VAT on either, NI may not be able to follow under the Brexit NI Protocol Agreement rules since it is bound by EU limits on the use of reduced VAT rate for goods.

A further issue is the new EU VAT rate setting freedoms which may give rise to VAT rate divergence between NI and the rest of the UK. This could distort markets and encourage fraud.

Northern Ireland Protocol of EU VAT VAT rules for goods

NI is now aligned to the EU VAT regime for goods as part of the Brexit Trade & Cooperation Agreement and NI Protocol. This helped prevent the need for a customs border between NI and the country of Ireland. This means NI must follow the lower limit of VAT on domestic energy products as per the VAT Directive’s Annex III positive list, which is 5%.

These EU restrictions are due to be updated following agreement on reduced EU VAT rate freedoms agreement at the end of 2021. This is subject to a non-binding EU Parliament vote shortly. This extends the right to member states to have a single reduced rate below 5% on up to seven pre-determined categories of goods and services, including environmentally-friendly supplies. However, this comes with the requirement to withdraw many historical exception rates that member states retained on their accession to the EU. This includes the NI which retained the UK’s old rate structure and EU rights.

The UK has already asked for more freedoms in this area in its July 2021 Command Paper on Protocol reforms.

NI’s VAT therefore faces a number of questions:

  • If the UK cuts energy or petrol VAT, would NI be blocked in following it?
  • Once the new EU reduced rate freedoms come into place, will NI lose some of the exemptions that the rest of the UK can retain; and will it be numericall restricted to the goods it may apply the new, lowest rate to under the new EU rule?
  • In both of the above, could the mean a misalignment of rates within the UK VAT regime, which may encourage unhelpful market distortions or even VAT fraud?

The UK in particular is now pushing for the redrafting of the Protocol, including NI’s alignment to EU VAT regime.  It is however unlikely that a resolution to any of these questions will come soon given the political uncertainties – unless anti-inflation VAT rate cut in the UK forces the issue.


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