As from 1 January 2021, the EU VAT legislation will no longer apply to the UK. However, on the basis of the Protocol on Ireland/Northern Ireland 3 (hereafter the ‘Protocol’), which is part of the Withdrawal Agreement, Northern Ireland will remain under the EU VAT legislation regarding goods with a view to avoiding a hard border between Ireland and Northern Ireland. For services, on the other hand, Northern Ireland is, together with the rest of the UK, considered as outside the EU.
This inevitably leads to a dual or mixed VAT system in Northern Ireland whereby supplies, intra-Community acquisitions and importations of goods that are located in Northern Ireland, according to the rules on the place of taxable transactions laid down in Title V of the VAT Directive 4 , are subject to the harmonised EU rules, while supplies of services made in that same territory are not subject to the EU VAT system.
In order for the EU VAT system to function properly, it is essential that taxable persons carrying out in Northern Ireland supplies of goods (including so-called ‘intra-Community supplies’) or intra-Community acquisitions of goods (including by non-taxable legal persons) as listed in Article 214, are identified for VAT purposes according to the EU rules. This is also necessary to ensure the proper functioning of the optional special schemes for taxable persons supplying services to non-taxable persons or making distance sales of goods.
From that perspective, it is important that those taxable persons (and, where appropriate, non-taxable legal persons) are identified in Northern Ireland via a separate EU VAT identification number, granted according to the EU rules and that is different from any UK VAT identification numbers (starting with “GB”) which will be granted according to the UK legislation. It is possible that this EU VAT identification number will have to be attributed in addition to the VAT identification number applied in the UK in case, for example, a business supplies both goods and services in Northern Ireland.
For businesses, in particular those involved in the trade in goods to and from Northern Ireland, it should be clear and easy to understand which rules apply, that is either those in force in the EU or those applicable in the UK. The EU VAT identification number plays an important role in the functioning of the EU VAT system, e.g. to justify the exemption for so-called ‘intra-Community supplies’ of goods (via the VIES system), to determine the applicable VAT refund procedures (EU VAT refund system 5 or the 13th Directive 6 ), VAT grouping, triangular transactions and chain transactions (‘intermediary operator’), call-off stock arrangements, ‘customs procedure 42’, the ‘safety net’ (place of intra-Community acquisition in the Member State that has issued the VAT).
Therefore, it is proposed that VAT identification numbers in Northern Ireland have the specific prefix “XI”. A new specific prefix is necessary since Northern Ireland has no specific ISO code 3166 – alpha 2, which is used to determine the prefixes of VAT identification numbers in the EU as stipulated in Article 215 of the VAT Directive. However, the ISO foresees in the possibility to use X-codes for territories that do not have a specific code; the code “XI” is therefore a logical choice.
To note that, while there is an overall obligation under Article 214 of the VAT Directive to identify VAT taxable persons (and, where applicable, non-taxable legal persons), the possibility also exists, subject to the conditions of Article 272 of the VAT Directive, to exclude certain taxable persons from this and other obligations. As a result, the UK could opt to limit the identification using the specific prefix to those traders in Northern Ireland that are effectively engaged in intra-EU trade of goods and exclude e.g. those businesses that only supply domestically.
As already mentioned, the VAT identification number (with the correct country prefix) plays an important role in intra-EU trade. A valid VAT identification number, with the correct prefix, is now a substantive condition in order to apply the exemption in Article 138 of the VAT Directive to so-called ‘intra-Community supplies’ of goods. It is also necessary for applicants to be able to access the EU VAT refund system.