Opinion & Analysis

Brexit: the customs challenge


On 17 January 2017 the Prime Minister, the Rt Hon Theresa May MP, set out the Government’s intention to leave the EU’s Single Market and its customs union.

In its Chequers White Paper, published in July 2018, the Government reiterated this commitment and proposed the establishment of a Facilitated Customs Arrangement (FCA) with the EU. This aims to preserve the status quo for UK-EU trade, while enabling the UK to pursue an independent trade policy. Alongside a free trade area for goods and a ‘common rulebook’, there would be no tariffs and no routine customs controls.

HM Revenue and Customs estimates the FCA to cost UK importers £700 million a year. Under ‘no deal’, the estimated annual cost to UK traders would be £18 billion.

The proposed FCA includes the operation of a dual tariff: for goods from non-EU countries, either the EU or the UK tariff would be charged, depending on their final destination. If this cannot be firmly established, UK customs authorities would initially charge the higher tariff, but businesses would be able to claim back the difference on providing proof of the goods’ final destination.

We find the FCA proposal still raises a number of significant questions that need to be resolved, not only for it to be workable, but also acceptable to the EU. With only six months before the UK’s scheduled exit from the EU, agreement on the principles underpinning any future customs arrangements has become a matter of urgency.

The Government has not yet made clear how goods could be reliably tracked and who would carry liability for keeping EU and UK-destined goods separate. The EU might fear that the lack of a robust tracking mechanism could increase the risk of fraud. The EU could also argue that the FCA gives the UK an unfair competitive advantage. Most significantly, the UK’s proposal to collect revenue on behalf of the EU makes agreement particularly difficult, and Michel Barnier, Chief Negotiator of the European Commission on the UK’s exit from the EU, has stressed that the EU will not delegate duty collection to a non-Member State. The Government therefore needs to provide greater clarity on the operation of the scheme and on how it intends to address the EU’s concerns.

The FCA’s repayment mechanism is untested and we understand it will take several years to be developed and implemented. The operation of the repayment mechanism can be made easier by reducing the volume of businesses having to engage with it, through the expansion of trusted trader schemes. We recommend simplifying the application process for the trusted trader schemes to facilitate access for small and medium-sized enterprises and urge the Government to seek mutual recognition of its scheme by the EU. The Government’s estimate that 96% of UK goods trade would be able to pay the correct tariff up front has been challenged and we call on the Government to clarify how it arrived at this figure.

We find that, in the case of ‘no deal’, trading with the EU under World Trade Organisation (WTO) rules would be disruptive and costly. Tariffs would apply, and although tariffs are generally low, some sectors, such as the agricultural and automotive sectors, would be disproportionately affected. Businesses on both sides would have to meet additional administrative customs requirements, such as import and export customs declarations. An estimated 145,000 VAT-registered UK businesses, and potentially a further 100,000 under the VAT threshold, currently trade exclusively with the EU. They would either have to gain expertise in customs procedures or outsource part of the customs process to a customs broker or freight forwarder at a cost.

Roll-on/roll-off ports process the majority of trade in goods between the UK and the EU. The introduction of new customs checks at the border under ‘no deal’ would cause delays at these ports, thus disrupting highly integrated supply chains. The Port of Dover’s ability to handle its trade volume, for example, depends on vehicles flowing through the port without stopping for customs controls. In the case of ‘no deal’, customs paperwork would need to be checked and some goods would be subject to additional time-consuming regulatory checks. This would particularly affect manufacturing businesses that rely on components being able to cross and recross borders swiftly, and just-in-time supply chains, upon which food manufacturers and retailers depend for freshness and convenience. As a consequence, the attractiveness of trading with UK businesses could decrease, and we urge the Government to set out its plans to protect existing supply chains.

The customs requirements that would be imposed in the event of ‘no deal’ would require some form of physical border infrastructure on all sides, which is of particular relevance to the Northern Ireland/Ireland border. Any form of infrastructure would risk re-introducing a hard border, which could have severe consequences for UK-Irish relations. Additional customs checks would also cause disruption at roll-on/roll-off ports dealing with UK-Irish trade and—given the UK’s position as a land bridge between Ireland and mainland Europe—could cause delays to the flow of goods between Ireland and the rest of the EU.

Options to mitigate the disruption caused by a ‘no deal’ Brexit are limited. We welcome the Government’s intention to join the Common Transit Convention and the preparations made by HMRC to deal with additional customs declarations. However, there are few other options available to the Government in the short term. Technology does not yet provide a means for eliminating border checks, and WTO anti-discrimination rules mean that the UK could only decide to waive customs checks on goods arriving from the EU as part of a wider framework open to all countries. The EU would also need to reciprocate for these measures to be effective, and it has indicated that it would not waive checks on UK goods.

We believe it is imperative that the UK and the EU continue to engage in a constructive dialogue and seek a mutually acceptable agreement, as the current lack of clarity about future customs arrangements and the possibility of a ‘no deal’ are having an adverse impact on UK businesses.

Read the full report here