Leaving the Customs Union (part 3) – New Customs border

It is perhaps surprising that so much attention has been given to the Single Market, yet so little attention has been paid to the EU Customs Union. Particularly as leaving the EU Customs Union has potentially greater impacts on UK trade than leaving the Single Market

In my previous posts, I looked at how leaving the Customs Union results in: 

• A repatriated trade policy requiring new WTO Schedules and new third country trade agreements.
• Imposition of Tariffs / Rules of Origin processing on UK-EU trade

In this post, I will look at the impact of a new Customs Border on UK-EU trade.

Customs Legislation

At present, UK customs operations are governed by the Union Customs Code (UCC), some 1300+ pages of EU legislation. Entering into effect on 1 May 2016, with implementation planned up until 31 December 2020, the UCC provides new framework regulation for modernised customs rules and procedures throughout the EU. The stated aims of the UCC are simplicity, service and speed. On leaving the EU, the UK will need to implement its own customs legislation. The Great Repeal Bill will adopt the UCC, suitably amended for the UK customs territory. Post-Brexit, the UK and EU will view each other as “third countries” with mirrored customs regulations for handling imports/exports.

Dispatching Goods in the EU

Movement of goods within the EU's Customs Union are not termed as imports/exports – goods are “dispatched” from the originating state and deemed as “arrivals” at the destination state. This process is simpler than import/export processes for third countries and can be undertaken electronically, but there is still an administration burden:

• Export licenses are required for some goods, e.g. military goods, Chemicals, medecines/controlled drugs etc.
• VAT Zero-rated if exporting to an EU VAT registered business, otherwise VAT must be charged at the prevailing rate in exporters state. All VAT invoices must be retained.
• Intrastat returns A monthly declaration of VAT sales used to collect statistics on the trade in goods between EU member states. Introduced 1 Jan 1993 to replace customs declarations for intra-EU trade.
• Excise is charged for some goods e.g. alcohol, tobacco and hydrocarbon oils.
• Supporting Documentation Full commercial transport documentation must be retained as proof of physical export.

Although "arrivals" are not subject to any customs formalities, checks on goods are undertaken on the basis of risk analysis to target inspections on “high-risk” consignments and allow rapid passage of “low-risk” consignments. Paraphrasing Jim Harra (HMRC) from his evidence to the House of Commons Treasury Committee :

• Each EU member state administers its own customs authority and makes its own decisions on checking.
• In the absence of customs declarations and routine customs controls, HMRC rely on other sources of intelligence and information about what is crossing the border.
• Risk-based checks are carried out on intra-EU trade, focussed on excise risks and security risks.

Customs Processing as third country

On leaving the EU Customs Union, both the UK and EU will introduce routine customs controls and customs declarations. UK exports to the EU will be subject to the same treatment by HMRC as current UK exports to third countries.  On import to the EU, these goods will become subject to EU import rules for third countries. In the same way, EU exports to the UK will become subject to the current HMRC process for imports from third country to the UK. The administrative burden will increase:

• Export licenses as per current EU “Dispatching” process described above.
• Economic Operator Registration and Identification (“EORI”) status is already required for operators established in the EU and operators established outside the EU who trade within the EU.
• Import Control System (ICS) EU Security laws introduced in Jan 2011 require an Entry Summary Declaration (ENS) of cargo information to be lodged at the first customs office of entry to the EU for imports from third countries.
• Customs Declarations are required to be submitted electronically or on paper copy of the 8-page Single Administrative Document (SAD). (See also UK Govt SAD guidance)
• Supporting documentation is required for Customs Clearance : Commercial invoice; Customs value declaration; Freight documentation & insurance; Packing list. In many cases, this will be similar/identical to the commercial supporting documentation retained as per current EU “Dispatching” process described above.
• VAT Exports to third countries are usually zero-rated. Imports from third countries are charged at prevailing local rate, although VAT-registered businesses can reclaim the VAT.
• Excise as per current EU “Dispatching” process described above.
• Import Tariff / RoO Imports from third countries to the EU will need to pay import duty (the Common External Tariff), unless a preferential trade agreement is in place and Rules of Origin (RoO) paperwork is provided to prove qualification for a preferential tariff rate. (Refer to earlier blog)

Regarding checks on goods for third country imports, Jim Harra's (HMRC) evidence suggests:

• Introduction of routine customs controls and customs declarations made in advance will increase information for risk analysis and so provide better targeting of inspections for UK-EU trade.
• Non-EU trade today: 99% declarations are electronic, 96% cleared in seconds, only 4% subject to checks, vast bulk of checks are documentary checks only rather than physical inspections.

Challenges & Costs of New Customs Border

Border Crossing Costs. During the Referendum Campaign, HM Treasury's “Analysis of the economic impact of EU membership” suggested that the new customs border could add 24% cost to transaction values. But as explained by Open Europe's analysis, this figure is based on an OECD range of 2-24%, with the 24% applying to much less developed economies. For the UK, this figure is more likely to be in the 2% region, which tallies with an earlier HM Government FoI response (page 5) estimating the cost at 2% of transaction values and analysis at “The Door To Freedom” blog post.

Customs Declarations In evidence to the Treasury Committee, Helen Goodman referenced a 2006 study by KPMG suggesting customs procedures cost £800m pa, with customs declarations for non-EU goods amounting to a third of this total. Goodman also related that agents can act on behalf of small firms at a typical cost of €20 and €80 per declaration. In evidence to an Irish Parliament Committee, Carol Lynch, (BDO Ireland), suggested an agent cost of €100 per movement would apply to a post-Brexit border in Ireland - a heavy burden for SME's.

Capacity Last year 4.4 million driver accompanied freight vehicles moved between the UK and continental Europe, primarily via Dover ferries or Channel Tunnel shuttle (RHA Brexit Analysis). Roll-on / Roll-off (Ro-Ro) freight is 78% UK-EU trade (BIFA on Brexit) and 99% of traffic at Port of Dover (Dept of Transport). Delays introduced by routine customs controls and checks would seriously impact the ports and roads in and out of them – and impact time-sensitive supply chains. HMRC expect a five-fold increase in customs declarations when UK leaves the customs union, a huge impact on its IT systems.

Road Haulage The UK Road Haulage market will face changes following Brexit (TheRoad Haulage Association (RHA)). Under the current EU regime, truck drivers are licensed to drive throughout Europe without the need for permits at every border. Cabotage rights allows haulage companies to provide domestic haulage in all european markets as well as international haulage.

Rules of Origin (RoO) (Open Europe's 2014 Brexit Report assumed a cost of 4% of transaction values), VAT (payable on imports although can usually be reclaimed), Entry Summary Declaration (ENS) requirement for third country imports to the EU – all will add burdens to business.

Ireland The land border between Northern Ireland and the Republic of Ireland is 498km long with over 300 crossing points. Since the end of the Troubles, it has been an an open and invisible border, cutting through villages, fields and in some cases even houses. The prospect of a customs border in Ireland replacing the current relatively frictionless and invisible border is the cause of much understandable concern.

• The bulk of Northern Ireland's trade is with mainland Britain, but it's largest and fastest growing non-UK trade partner is the Republic. The Republic's main trade partner is Northern Ireland & Great Britain (In 2015 the UK imported some Euro 14.7 billion from Ireland and exported just under Euro 20 billion to Ireland).
• Businesses and supply chains operate freely across the border. Analysis by Ireland's Revenue commissioners suggests that most goods crossing the border should not need physically checking – agri-food and construction related make up much of this traffic.
• Transit is also a key issue, with much of Republic of Ireland's trade to the continent crossing though Britain and across the channel. Also, much of Northern Ireland's trade with Great Britain is shipped via Dublin.

Mitigations for new Customs Border

The impact of a new customs border can be mitigated by simplified customs procedures and investment in technology and infrastructure. The aim will be a customs process that is electronic as far as is possible, with declarations submitted and cleared in advance, simplified customs processing for trusted / accredited traders & speedy passage through customs, with checks performed away from the border wherever possible. As Charlie Elphicke MP states in his paper "Ready on Day One", "the border should be a tax point, not a search point".

Trade Facilitation. The 2013 WTO Trade Facilitation Agreement (TFA), to which the EU is a signatory,“expedites the movement, release and clearance of goods crossing borders” (RobertJ. Bowman).

• The latest revision of the UCC complies with the WTO TFA. Electronic submission of data in EU customs operations has been in place for many years. Measures such as Customs Freight Simplified Procedures, (“CFSP”) for example, allow for electronic pre-notification of freight movements and removes border “choke-points”, by allowing customs control to take place at the importers’ premises. (Legatum Institute's "Brexit, Movement of Goods and the Supply Chain"). “CFSP implementation will put you three quarters of the way to Authorised Economic Operator Status (AEO).” (International Trade Solutions white paper)
• The new UK Customs legislation will copy over all the UCC trade facilitation measures. In fact, it provides an opportunity to increase facilitation, as per Jim Harra's (HMRC) evidence :”We would be looking to see whether the UK can make further facilitative changes that we did not get under the Union Customs Code but that we know UK trade would have liked.”

Authorised Economic Operator (AEO) is defined by the WCO SAFE Framework of Standards as a party involved in the international movement of goods approved by a national Customs administration as complying with WCO or equivalent supply chain security standards.

• The EU’s AEO programme is based upon WCO standards. EU AEO status is a regional certification of traders/operators approved at member state level. On leaving the EU, the current EU AEO scheme administered by UK Govt will need to be converted into an independent UK AEO scheme.
• Operators benefit from AEO status for example by simplified customs procedures; fewer physical and document-based controls at the border & “fast-track” through customs controls; waiver from mandatory debt guarantee for customs procedures such as inward processing etc.
• Implementation (in both UK and EU) of UCC provisions for AEO accredited traders to submit customs documentation as periodic self-assessment would allow customs duties to be paid in arrears. Entry in Declarants Records (EIDR) allows goods to enter a customs procedure without a full customs declaration (See UK Govt guidance on UCC).
• In Britain, the AEO scheme currently covers 60% of UK imports and 74% of exports, but only 508 companies - primarily larger companies. ("Nothing to Declare"). This should be expanded to cover smaller businesses, and ideally developed into a fully-fledged Trusted Trader Scheme, as currently used in Canada and Australia ("Ready on Day One").

Infrastructure. The Channel ports are already struggling with daily traffic of 10,000 HGVs, projected to rise to 16,000. Investment in capacity is a necessity even without the complications of increased declarations, inspections and concomitant delays. Charlie Elphicke MP in his paper "Ready on Day One" has recommended investment in roads approaching Dover to provide a resilient road network: build the new Lower Thames Crossing; widen the M20, dual the M2/A2 all the way to the Channel ports; build the Stanford West lorry park on the M20 (Govt has put aside £250m for this project).

Technology. Modern technology will be required to optimise customs clearance :

• HMRC’s current IT system Customs Handling of Import and Export Freight (CHIEF) is in the process of being replaced with a new system, Customs Declaration Service (CDS). This new system will process a larger volume of declarations and support UCC and AEO trade facilitation measures.
• Single Window, which ”allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfill all import, export, and transit-related regulatory requirements. If information is electronic then individual data elements should only be submitted once.”. The UK should streamline HMRC’s IT infrastructure and create a one-stop shop for all business-to-government trade communication covering customs, excise & vat. HMRC has already outlined its ambition to use the new CDS system as the technology platform to launch its ‘Single Window’ ambition. ("Nothing to Declare"). An EU Single Window project is in progress as part of its Customs 2020 program.
• Free and Secure Trade (FAST) and Nexus/RFID (used on the Canadian border) could be adopted for use at Dover, which as a ‘land bridge’ has a uniquely high volume of Ro-Ro traffic ("Ready on Day One"). Both the FAST and RFID / Nexus programs provide dedicated lanes and streamlined processes to trusted traders for faster border crossing. The Nexus ID card embeds intelligent tag radio frequency identification (RFID) technology. Presentation of the card to an RFID reader instantly displays photo identification & other information to the customs officer, who can then give authorisation to proceed. The EU have piloted the EU – China Smart and Secure Trade Lanes (SSTL) project, which tests end-to-end supply chain security instruments and mechanisms in line with WCO SAFE Framework of Standards.
• Automatic Number Plate Recognition (ANPR) is used on the Norway-Sweden border. Of 80 roads that cross the border, only about a dozen are staffed. Unstaffed crossings are regarded as customs green lanes, i.e. “nothing to declare” and are monitored by Pole-mounted ANPR cameras. Norway are now also installing ANPR cameras at the staffed crossings and piloting an automated system for trusted companies that will allow pre-cleared consignments to pass without stopping.

Special Status for Ireland. There is much discussion of the Norway-Sweden border as a model for Ireland post-Brexit : designated roads for freight to clear customs; potential use of ANPR technology; formal checks undertaken at locations away from the border etc. But this will still require customs formalities for goods crossing the border, which will heavily impact companies with supply chains and/or operations that traverse the Irish border – especially SMEs. An ex-Irish customs officer (@robmurphybe) tweets regularly on the issue of Brexit, customs and the Irish border – including a thread in June on a special case for Northern Ireland customs arrangements, in which he suggests :

• Special status AEO for Northern Ireland (extending coverage to SME's)
• Memorandum of Understanding between Irish Revenue Commissioners & HMRC (to address VAT issues arising from UK leaving customs union).
• Trade contact group (co-operation within the framework of the Good Friday agreement strand 2/north-south & strand 3/east-west).
• A special transit status for freight traffic within the island of Ireland - allowing movement of goods with customs formalities suspended until the goods either reach their destination or are exported outside Ireland.
• Most importantly a special origin status. Goods that qualify as originating in Northern Ireland would be facilitated in crossing the border. Such a scheme would need accreditation & authorisation and would need to satisfy OLAF (EU's anti-fraud body) and European Court of Auditors (ECA). My own thought is that such a scheme may need to be be extended to cover goods travelling in both directions across the border – provided the goods qualify as originating in either jurisdiction north & south of the border.

Conclusions

Leaving the Customs Union will result in a new customs border between UK and EU with routine customs controls and customs declarations at the border. Trade facilitation measures plus investment in IT and infrastructure provides the potential to reduce the trade friction introduced by a new customs border, but there is plenty of work for the UK government to undertake in preparation.

But it is also true to say we will be dependent on the EU being ready for a new Customs border. David Davis recently suggested that getting French, Belgian or Dutch customs ready in two years will be difficult and that is why a transitional period may be needed.

This is disingenuous from Davis. The replacement of HMRC's IT system CHIEF with CDS is not scheduled to go-live until January 2019, just 2 months before the UK leaves the EU. Furthermore, many of the important upgrades will occur in a phased timetable over 2019-20 (e.g. AEO upgrades are scheduled for October 2019). This timetable is broadly in line with the EU's Customs 2020 program, which will see UCC upgrades being implemented across all EU member states. Unfortunately, the Treasury Committee reports there has been a collapse in confidence in CDS since HMRC presented evidence to the Treasury Committee in Feb 2017. There is a significant risk CDS will not be ready by March 2019. There is also anxiety regarding the Channel ports (Dover &Channel tunnel) and lack of space / resources to cater for the additional burden of customs formalities for EU imports.

Given this dependency on timely delivery of UK Government IT and infrastructure projects and completion of the EU's customs 2020 program, a transitional period extending current customs union arrangements would seem to be a necessary step to achieve a smooth Brexit. This would also allow time to design and implement streamlined, facilitative and quick customs processes for the new UK-EU Customs border, as well as time for businesses to adapt to new processes.

Agreement with European partners will be needed for a transitional period and special arrangements for Ireland. Other important agreements will be needed: e.g. continued recognition of existing EORI registrations, AEO mutual recognition, Common Transit Convention, Community Licence for road haulage, maintaining customs co-operation and information exchange etc. A comprehensive customs agreement will be needed – a subject I will cover in my next post.

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I have referenced the following papers/documents in this post which are also worth reading for more details:. 

• Evidence to the House of Commons Treasury Committee (7th Feb 2017).
• "Brexit, Movement of Goods and the Supply Chain" (Legatum Institute).
• "Ready on Day One" (Charlie Elphicke MP)
• "Nothing to Declare" (Open Europe)