The UK Government and the EU have reached agreement on changes to the post-Brexit arrangements for Northern Ireland. We look at what's been agreed, what the timing is likely to be and whether it's a good deal for business.
The Windsor Framework: a good deal for business?
Overview
Key points
- Goods trade: For businesses based in the mainland UK which supply goods to Northern Ireland, the Windsor Framework will not deliver frictionless trade, but it does represent a significant improvement on the existing Northern Ireland Protocol – see section 2 (goods) and section 3 (VAT).
- Wider impact: For businesses which don't have any activities in Northern Ireland, the deal also has a number of wider ramifications which are broadly positive – see section 6
- Subsidies: The state aid position is broadly unchanged; this means that EU law will still need to be considered when assessing the legality of subsidies and other forms of state support offered by the UK – see section 4
- Democratic accountability: Although the "Stormont Brake" is hedged around with numerous conditions, experience of similar mechanisms under the EEA Agreement suggest that it may have value as a "political safety valve" – see section 6.
How did we get here?
The draft Windsor Framework is intended to alter the post-Brexit arrangements for Northern Ireland (NI), set out in the Northern Ireland Protocol to the Withdrawal Agreement, agreed in 2019. The UK-EU Trade and Cooperation Agreement, agreed in December 2020, did not alter these arrangements.
Why were special arrangements needed for Northern Ireland?
Both the EU and UK agreed that special arrangements were needed for NI to avoid the need for a hard border with the Republic of Ireland, which was seen as likely to undermine the progress which has been made since the Good Friday Agreement (or Belfast Agreement) in 1998. The UK had indicated that following Brexit, it wished to have the freedom to diverge from EU regulation in relation to goods. Whilst the EU accepted this, it was concerned that without some form of control mechanism, the existing arrangements in NI would enable non-compliant goods from Great Britain (GB) to enter the EU Single market.
The Northern Ireland Protocol therefore put in place various measures designed to provide assurance to the EU that products entering NI from GB would comply with EU standards. These included requirements for additional paperwork on all goods moving from GB to NI to demonstrate compliance with EU standards and allow monitoring, with sensitive goods such as agri-food products also being subject to a high level of physical inspections. Save where the Protocol contained easements or exceptions, goods entering from GB were essentially treated as if they were entering the Single Market from a third country, putting some products – such as sausages – at risk of being banned altogether (their continued sale in NI was only possible due to the extension of grace periods under the Protocol).
The Windsor Framework
The UK has been seeking significant changes to the Northern Ireland Protocol. In particular, it argued that it placed too many barriers in the way of trade between GB and NI. It also tabled legislation (the Northern Ireland Protocol Bill) intended to unilaterally disapply the Protocol. The EU took the view that, if implemented, that legislation would breach the Withdrawal Agreement.
Both sides have now agreed on a package of measures designed to adjust the post-Brexit arrangements for NI, known as the Windsor Framework (which, if adopted, will also be the new name for the Northern Ireland Protocol). As a result, the UK Government has now signalled that it sees no legal justification for the Northern Ireland Protocol Bill.
Goods trade
The new arrangements for goods trade are complex; this section only aims to highlight some of the key points and does not deal with the position on medicines or tariff rate quotas.
What will change under the Windsor Framework?
The proposed new arrangements envisage a simplified set of controls on GB-NI trade. The EU appears to have agreed to these in large part because of UK commitments to provide it with access to "real time" data on goods movements (which will help it to monitor the risk to the Single Market). Alongside this, there are a range of exceptions to the need to comply with the full requirements of EU rules, designed to address specific concerns raised by the UK. That said, the fundamental principle of the original Protocol remains i.e. unless exceptions apply, goods destined for NI are expected to comply with EU law (for reasons explained in section 1 above).
Without going into detail on all the changes, examples include the following:
- For goods which are deemed not at risk of entering the Single Market (i.e. goods intended for consumption in NI), the existing trusted trader scheme will be opened up to a wider range of businesses and the customs paperwork involved will be further simplified. If monitoring reveals that a trader's goods are in fact entering the Single Market, it will risk losing its trusted trader status. This amounts to a lighter touch regime for goods intended for consumption in NI – a so-called "green lane".
- By way of an exception to the normal EU rules relating to products from third countries, goods such as sausages will be permitted, provided they are only intended for consumption in NI; these products will need to be labelled "Not for EU".
- The additional paperwork required for sensitive goods such as agri-food products will be simplified where they are in the "green lane" and there is expected to be a very significant reduction in the volume of physical checks on such goods.
In simple terms, this amounts to the EU accepting a substantial relaxation of its normal rules for goods intended to be consumed in NI, going some way beyond the existing Northern Ireland Protocol. That said, if it emerges that non-compliant goods are finding their way into the Single Market via NI in significant numbers, the EU will have the ability to withdraw some of these relaxations.
Impact on distribution agreements
At present, it will often be more straightforward for distributors to agree to take on a territory consisting of GB only, with NI carved out; that way, they avoid the need to comply with the additional formalities and logistical challenges which may apply when distributing to NI. However, if the proposed measures have the desired effect of making it easier to distribute to NI from GB, this may make it more attractive for distributors to take on a territory consisting of the UK as a whole (including NI).
VAT
Under the Northern Ireland Protocol, VAT on goods in NI is aligned with EU rules. The Windsor framework has been described as ensuring that NI will be subject to the same VAT rules as the rest of the UK, but doesn't go quite this far. The approach is similar to that taken in relation to goods trade (see section 2) i.e. the framework provides for considerable flexibility on alignment with UK VAT rates by way of exceptions to the normal principle that EU rules on VAT should be followed.
Key changes on VAT
Firstly, the UK will be able to apply reduced VAT rates on goods supplied and installed in immovable property (this will allow the extension of zero VAT rates on energy saving materials such as heat pumps to NI). Secondly, the UK will be able to apply reduced VAT rates to a higher number of categories of goods than allowed under EU law. The UK and EU have also agreed to explore the possibility of creating a list of goods consumed in NI, which would permit additional flexibility on VAT rates on these goods.
The framework also establishes a new mechanism to allow the UK and EU to jointly consider the impact of future EU VAT changes on the operation of the internal UK market, potentially allowing further future divergence in NI from EU VAT rules.
State aid/subsidies
The Northern Ireland Protocol provides that the EU state aid rules continue to apply to the UK in respect of measures which affect trade in goods or electricity between Northern Ireland and the EU. One of the UK's concerns was that subsidy schemes which were primarily focussed on GB would still be subject to the EU state aid rules because it would not be possible to rule out the potential for "side effects" on EU-Northern Ireland trade. The effect of this would be that any such schemes would have to be notified in advance to the European Commission for clearance (unless they fell within a "block exemption" or were regarded as "de minimis").
The EU attempted to provide some comfort that the impact of this would be relatively limited by issuing a unilateral declaration. This stated that "an effect on trade between Northern Ireland and the Union which is subject to this Protocol cannot be merely hypothetical, presumed, or without a genuine and direct link to Northern Ireland. It must be established why the measure is liable to have such an effect on trade between Northern Ireland and the Union, based on real foreseeable effects of the measure."
What's changed?
A new draft joint declaration has been issued which expands in a limited sense on the above, primarily by offering some guidance on the relevant factors and evidence likely to be required to demonstrate that the EU state aid rules are engaged. This may be supplemented in due course by guidance from the UK and EU authorities. However, fundamentally, in our view, relatively little has changed in this area.
The position is therefore likely to remain broadly as set out in section 3 of this briefing, which looks at a case where British Sugar tried (unsuccessfully) to argue that, based on the Northern Ireland Protocol, the EU state aid rules applied to certain post-Brexit measures which it alleged favoured its competitor, Tate & Lyle. That case suggests that even under the current arrangements and the existing declaration (see above), it is not easy for a claimant to establish that the EU state aid rules are engaged – although for reasons explained in our briefing, that is unlikely to stop claimants from trying to do so. However, the possibility remains that if, for example, the UK wishes to put in place a nationwide subsidy scheme relating to goods which is open to businesses in NI as well as in GB, it may need to secure prior approval from the European Commission.
What's the likely timing?
The Windsor Framework is still in draft form at present and needs to be adopted by both the UK and the EU before it can take effect – so it is not yet a "done deal". But assuming both sides decide to proceed with it, what is the likely timing?
Although the exact timetable for its adoption and implementation is unclear at the time of writing, the published materials suggest that some parts of it (e.g. a scheme for used cars in NI) are expected to be operational by May 2023 – which suggests that both sides intend to proceed relatively swiftly with moves to formally adopt the necessary measures.
In terms of formal steps on the UK side, a vote in Parliament is not required but looks likely to be held in order to demonstrate political backing for the deal. Both sides will also need to pass certain legislation in order to implement aspects of the deal and the Joint Committee formed under the Withdrawal Agreement will need to adopt a number of draft decisions. The published materials also indicate that some of the key changes relating to goods e.g. the new trusted trader scheme are not expected to be in place until the Autumn. Indeed, some aspects of the goods arrangements are not expected to be fully implemented until 2025 – so even if the deal is adopted relatively swiftly, we are looking at a timetable of years, not months when it comes to implementing the new arrangements.
Is it a good deal?
Purists on either side are unlikely to be satisfied owing to the compromises involved, but both sides can claim "wins" from the deal. For example, the EU can claim that it has not been had to concede on the fundamentals (e.g. that in principle, goods from GB destined for NI should comply with EU rules), whilst the UK can claim that it has secured a wide range of easements and exceptions from EU law, targeted at aspects of the Northern Ireland Protocol which were causing genuine concern in practice.
The deal also has a number of potential wider benefits beyond Northern Ireland – for example, it may well "unblock" a number of areas where the UK had hoped to make progress in talks with the EU, such as its participation in the Horizon scientific research scheme and regulatory cooperation on financial services. For more detail and discussion of other potential wider benefits, see our briefing "The Windsor Framework: what does it mean for businesses with no activities in Northern Ireland?".
How significant is the Stormont Brake?
The UK has also argued that the "Stormont Brake" will address the "democratic deficit" that arguably arises because the Protocol requires new or amended EU rules on goods to be incorporated, even though NI no say in the making of those rules. Some commentators have suggested that this mechanism would in practice be difficult to invoke as it is hedged around with numerous conditions. Whilst this may prove to be the case, experience of similar mechanisms in the EEA Agreement suggests that the Stormont Brake may still have value as a "political safety valve".
For example, as outlined in this legal opinion, EEA Member States have very occasionally sought to pull on a similar "brake" which relates to incorporation of new EU law into the EEA Agreement. In practice, they have never gone "all the way" – possibly in recognition of the difficulties in doing so. However, such actions have often led to delays in the incorporation of new EU law – and that time has often been valuable in resolving the issue, either because domestic politics moves on or because it allows a breathing space in which technical compromises can be agreed to address key concerns (much like those embodied in the Windsor Agreement). It is also worth noting that concerns in EEA countries have so far arisen in relation to areas such as postal services, anti-moneylaundering and citizenship, as opposed to EU goods legislation, which is the main focus of the Northern Ireland Protocol.
Is it a good deal for business?
For businesses based in GB which supply goods to NI, the Windsor Framework will not deliver frictionless trade, but it does represent a significant improvement on the existing Northern Ireland Protocol. Meanwhile, the deal also has a number of wider ramifications which are positive even for businesses which don't have any activities in NI.
Beyond Brexit: more information
As the level of debate surrounding the Windsor Framework demonstrates, the fallout from Brexit is not just a political issue and continues to be a live issue for business, despite the UK having left the EU and entered into a new, more distant trading relationship. For more information, see our Beyond Brexit client portal, which includes coverage of:
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