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Can the EU and UK avoid a trade war over the Northern Ireland Protocol?

Ireland’s Minister of Foreign Affairs expressed concern that the UK could take unilateral action over the Northern Ireland protocol. Foreign Affairs Minister Simon Coveney said that if the UK invokes the ‘safeguards’ built into Article 16, a clause in Northern Ireland protocol allowing either side to take unilateral action in the case of ‘serious’ difficulties, there would be serious repercussions.

“This would be a significant act that would damage relationships between Britain and Ireland and put extraordinary pressure on parties in Northern Ireland,” Coveney told RTE.

Trade war looming?

In response to heightening diplomatic tensions between the UK and EU over the Northern Ireland Protocol, the EU proposed a set of ‘ bespoke arrangements to benefit Northern Ireland’.

However, the proposal does not seem to have won favour in London. 

Analysts are concerned that a breakdown in negotiations could lead to a trade war. In such a case, each side would likely impose retaliatory tariffs. (In contrast to the terms of the Brexit trade deal, which allows for tariff-free trade between the UK and EU in many cases.)

What are the consequences of triggering Article 16?

In theory, Article 16 could be used judiciously by either side to address serious economic  difficulties arising from the  Protocol. 

However, given the current deadlock, analysts are concerned that triggering Article 16 could lead to a diplomatic breakdown. Consequently, a trade war is now a more plausible outcome. 

It is important to note, though, that a trade war is far from inevitable. Both sides have a strong interest in avoiding unnecessary barriers to trade.

How does the Northern Ireland Protocol affect VAT compliance? 

The terms of the Northern Ireland Protocol have far-reaching VAT compliance consequences. The situation is complicated because, in terms of the Protocol, Northern Ireland is effectively part of the EU single market. However, HMRC still manages VAT in Northern Ireland. 

For example, businesses in Northern Ireland have the option to use the EU Import One Stop Shop to manage VAT on goods drop-shipped to Northern Ireland from outside the EU. NI businesses can also take advantage of the One Stop Shop on the sales of goods between NI and EU markets. 

Unusually in the case of Northern Ireland, the IOSS and OSS are managed by HMRC. However, as an EU initiative, neither the IOSS nor the OSS is applicable to businesses located in Great Britain. 

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