Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC on the common system of value added tax as regards the identification of taxable persons in Northern Ireland
Date: 2020-08-07
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Northern Ireland, VAT, application of EU law, fiscal policy, goods and services, supply, taxpayer

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   EUROPEAN COMMISSION  Brussels, 7.8.2020  COM(2020) 360 final 2020/0165 (CNS)  Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC on the common system of value added tax as regards the identification of taxable persons in Northern Ireland  
 
EXPLANATORY MEMORANDUM 

1. 

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CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

The  United  Kingdom  (UK)  has  left  the  European  Union  (EU)  on  31  January  2020.  In 
accordance with the Withdrawal Agreement1, it is now a third country to the EU. 

However,  the  EU  and  the  UK  jointly  agreed  on  a  transition  period  until  the  end  of  2020 
during which, inter alia, the EU VAT legislation will continue to apply in the UK2. 

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 Ireland3 (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 
Directive4,  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 

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Council  agreement  on  the  withdrawal  of  the  United  Kingdom  of  Great  Britain  and  Northern  Ireland 
from  the  European  Union  and  the  European  Atomic  Energy  Community  (OJ  C384  I  of  12.11.2019, 
p. 1). 
See Articles 126 and 127 of the Withdrawal Agreement. 
OJ C384 I of 12.11.2019, p. 92. 
Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 
347 of 11.12.2006, p. 1). 

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applicable  VAT  refund  procedures  (EU  VAT  refund  system5  or  the  13th  Directive6),  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. 

• 

Consistency with existing policy provisions in the policy area 

The proposed use of the “XI” code is consistent with its intended use for Customs and Excise 
purposes in relation to Northern Ireland. 

• 

Consistency with other Union policies 

The  proposal  is  consistent  with  the  overall  implementation  of  the  Protocol  as  to  ensure  a 
timely  and  orderly  preparation  of  the  particular  position  of  Northern  Ireland  after  the 
withdrawal of the UK from the EU. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

The  Directive  amends  the  VAT  Directive  on  the  basis  of  Article 113  of  the  Treaty  on  the 
Functioning  of  the  European  Union.  This  provision  provides  for  the  Council,  acting 
unanimously  in  accordance  with  a  special  legislative  procedure  and  after  consulting  the 
European  Parliament  and  the  Economic  and  Social  Committee,  to  adopt  provisions  for  the 
harmonisation of Member States' rules in the area of indirect taxation. 

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Council Directive 2008/9/EC of 12 February 2008 laying down detailed rules  for the refund of  value 
added  tax,  provided  for  in  Directive  2006/112/EC,  to  taxable  persons  not  established  in  the  Member 
State of refund but established in another Member State (OJ L 44, 20.2.2008, p. 23). 
Thirteenth Council Directive 86/560/EEC of 17 November 1986 on the harmonization of the laws of the 
Member States relating to turnover taxes  - Arrangements for the refund of value added tax to taxable 
persons not established in Community territory (OJ L 326, 21.11.1986, p. 40). 

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Subsidiarity (for non-exclusive competence)  

According to the principle of subsidiarity, as set out in Article 5(3) of the Treaty on European 
Union,  action  at  Union  level  may  only  be  taken  if  the  envisaged  aims  cannot  be  achieved 
sufficiently by the Member States alone and can therefore, by reason of the scale or effects of 
the proposed actions, be better achieved by the EU. 

VAT arrangements in relation to Northern Ireland can, by their very nature, not be decided by 
individual  Member  States.  Moreover,  VAT  is  harmonised  at  EU  level  and,  therefore,  any 
initiative  to  introduce  a  specific  code  to  be  used  for  the  EU  VAT  system  in  relation  to 
Northern Ireland requires a proposal by the Commission to amend the VAT Directive. 

• 

Proportionality 

The proposal, as far as the introduction of the special code for Northern Ireland is concerned, 
is consistent with the principle of proportionality i.e. it does not go beyond what is necessary 
to  meet  the  objectives  of  the  Treaties,  in  particular  the  smooth  functioning  of  the  single 
market after the withdrawal of the UK from the EU. Similar to the subsidiarity test, it is not 
possible  for  Member  States  to  deal  with  the  practical  aspects  of  the  special  situation  of 
Northern Ireland in the EU VAT system without a proposal to amend the VAT Directive. 

• 

Choice of the instrument 

A Directive is proposed in view of amending the VAT Directive. 

4. 

BUDGETARY IMPLICATIONS 

The proposal will have no negative implications for the Union budget. 

In this context, it is reminded that, in accordance with the second paragraph of Article 8 of the 
Protocol, revenues resulting from transactions that are taxable in Northern Ireland shall not be 
remitted to the EU.  

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2020/0165 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2006/112/EC on the common system of value added tax as regards 
the identification of taxable persons in Northern Ireland 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 113 thereof, in  conjunction  with  Article 131 of the Agreement on the withdrawal  of 
the United Kingdom of Great Britain and Northern Ireland from the European Union and the 
European Atomic Energy Community1, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 
Having regard to the opinion of the European Parliament2, 
Having regard to the opinion of the European Economic and Social Committee3,  

Acting in accordance with a special legislative procedure, 

Whereas: 

(1) 

(2) 

(3) 

The United Kingdom withdrew from the European Union on 31 January 2020 on the 
basis of the Agreement on the withdrawal of the United Kingdom of Great Britain and 
Northern  Ireland  from  the  European  Union  and  the  European  Atomic  Energy 
Community (‘the Withdrawal Agreement’). The Withdrawal Agreement provides for a 
transition  period  ending  on  31  December  2020.  Until  that  date,  Union  legislation  on 
value added tax (‘Union legislation on VAT’) continues to apply to and in the United 
Kingdom.  After  the  transition  period,  the  Union  legislation  on  VAT  will  no  longer 
apply to or in the United Kingdom. 

However,  in  accordance  with  Article  8  of  the  Protocol  on  Ireland/Northern  Ireland 
(‘the  Protocol’),  which  is  part  of  the  Withdrawal  Agreement,  Union  legislation  on 
VAT will continue to apply in Northern Ireland4 after the transition period as regards 
goods so as to avoid a hard border between Ireland and Northern Ireland.  

Therefore, taxable persons and certain non-taxable legal persons will be subject to the 
Union legislation on VAT for transactions in goods in Northern Ireland, whereas they 
will be subject to the United Kingdom legislation on VAT for all other transactions in 
the United Kingdom, including in respect of Northern Ireland. 

(4) 

For the proper functioning of the Union VAT system, it is essential that a distinct VAT 
number  is  granted  to  every  taxable  person  who  carries  out  supplies  of  goods  in 

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OJ L 29, 31.1.2020, p. 7. 
OJ C , , p. . 
OJ C , , p. . 
Subject to the democratic consent, referred to in Article 18 of the Protocol on Ireland/Northern Ireland, 
to the continued application of Article 8 thereof. 

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Northern Ireland or makes intra-Community acquisitions of goods (including by non-
taxable legal persons) as listed in points (a), (b) and (c) of Article 214(1) of Council 
Directive  2006/112/EC5,  or  to  a  taxable  person  in  view  of  the  use  of  the  optional 
special  schemes  for  taxable  persons  supplying  services  to  non-taxable  persons  or 
making distance sales of goods. 

Therefore,  distinct  VAT  identification  numbers  with  a  specific  prefix  should  be 
introduced in Northern Ireland to distinguish between taxable persons and non-taxable 
legal  persons  whose  transactions  in  goods  located  in  Northern  Ireland  are  subject  to 
Union  legislation  on  VAT,  on  the  one  hand,  and  persons  carrying  out  other 
transactions for which they are identified for VAT purposes in the United Kingdom. 

As a rule, prefixes of VAT identification numbers in the Union are based on ISO code 
3166 – alpha 2 for countries. Northern Ireland has no specific code under that system, 
but the ISO foresees in the possibility to use X-codes for territories that do not have a 
specific  code.  Therefore,  it  is  appropriate  to  propose  the  code  “XI”  for  Northern 
Ireland. 

(5) 

(6) 

(7) 

Directive 2006/112/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DIRECTIVE: 

In Article 215 of Directive 2006/112/EC, the following third paragraph is added: 

‘The prefix “XI” shall be used for Northern Ireland’. 

Article 1 

Article 2 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions necessary to comply with this Directive by 31 December 2020. They shall 
immediately communicate the text of those measures to the Commission. 

When  Member  States  adopt  those  measures,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication.  Member  States  shall  determine  how  such  reference  is  to  be  made  and 
how that statement is to be formulated. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

This Directive shall enter into force on the day following that of its publication in the Official 
Journal of the European Union. 

Article 3 

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Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 
347, 11.12.2006, p.1). 

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This Directive is addressed to the Member States. 

Done at Brussels, 

Article 4 

For the Council 
The President 

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