UK government sets out proposals for future customs arrangements
30th August 2017
Since the UK Government’s announcement at the beginning of the year that the UK would leave the EU Customs Union after Brexit, businesses have been keen to understand what customs formalities will apply to the cross-border trade between the UK and the EU.
On 15 August 2017, the Government published its position paper on “Future customs arrangements” (“Position Paper”) which intended to provide some clarity to businesses as well as give the EU some food for thought before the third round of the Brexit negotiations begin at the end of August. In short, the Government wants trade between the UK and the EU to continue to be as “frictionless and seamless as possible”, whilst also being able to negotiate its own preferential trade agreements with non-EU countries - something which EU Member States are unable to do.
In this briefing we consider the UK Government’s proposals and comment on their feasibility. The proposals are of particular relevance to the retail sector, where business offerings are often based on short delivery periods and smooth processing of goods cross-border. The imposition of additional customs formalities and procedures post-Brexit is likely to result in customs clearance delay and increased costs for businesses. Depending on the outcome of EU-UK negotiations, retailers will need to be prepared to implement changes to their delivery terms, logistics and pricing structures in order to remain competitive. What is the EU Customs Union?
All EU Member States are members of the EU Customs Union. This means that:
- all goods moving between the UK and other EU Member States are not subject to customs duty, quotas or routine customs processes; and
- Member States apply the EU’s Common External Tariff on all goods which enter the EU from non-EU countries, as well as the EU’s quotas, rules of origin (i.e. the criteria used to determine the origin of a product, which is one of the elements needed to determine the applicable tariff rate) and customs processes. The EU enters into free trade agreements and negotiates the tariff levels and quotas with non-EU countries on behalf of all EU Member States.
Once the UK leaves the EU Customs Union, goods moving between the UK and the EU would be subject to import tariffs as well as increased administrative burdens, such as customs checks and declarations.
The Government’s Position Paper
The Government has proposed two scenarios for the UK’s future customs relationship with the EU to ensure that UK-EU trade is as “frictionless” as possible:
- a highly streamlined customs arrangement between the UK and the EU, which the Position Paper describes as a continuation of some of the existing arrangements, putting in place new negotiated and potentially unilateral facilitations to reduce and remove barriers to trade, and implementing technology-based solutions to ease compliance with customs procedures; and
- a new customs partnership with the EU, which focuses on aligning the UK’s approach to customs with the EU’s procedures, in a way that removes the need for a UK-EU customs border.
The ‘highly streamlined customs arrangement’ would involve the UK and the EU agreeing on the application of simplified customs formalities, to remove as many restrictions as possible on UK-EU trade. It would also require the EU to implement equivalent arrangements at its borders with the UK. The Government acknowledges that this approach would still result in an increase in the administration burden for businesses, compared with remaining inside the EU Customs Union.
The Position Paper provides examples of how this customs arrangement could operate, which include:
- negotiating a waiver from the requirement to submit entry and exit summary declarations for goods moving between the UK and the EU;
- membership of the Common Transit Convention, which would allow goods traded between the UK and the rest of the world to travel through the EU without paying EU duties and which would simplify border clearances at key ports and airports;
- negotiating mutual recognition of Authorised Economic Operations (AEOs) enabling faster clearance of AEOs’ goods at the border;
- bilateral implementation of a technology-based solution for customs clearance;
- self-assessment procedure, allowing traders to calculate their own customs duties and aggregate their customs declarations.
A new customs partnership between the UK and the EU, aiming to remove the need for a UK-EU customs border, would be a much greater challenge. The Position Paper acknowledges that this is an “innovative and untested approach”, which does not give much comfort to businesses in terms of providing more certainty in relation to the trading conditions post-Brexit.
The Government’s vision is, in essence, that, in relation to goods destined for the EU (with the UK as part of the supply chain), the UK would continue to apply the customs procedures that are currently in place between the UK and the rest of the EU. The UK would apply the EU’s Common External Tariff on such goods as well as the EU’s rules of origin. It would also afford such goods preferential treatment where they fall within the scope of any free trade agreement that the EU has in place. The UK would, however, be free to impose its own tariffs on goods imported from other countries into the UK as a final destination.
The ‘highly streamlined customs arrangement’ proposal shows that the Government understands the importance of minimising any trade-related disruption caused by Brexit. In particular, it recognises the need to reduce as much as possible the burden of additional customs formalities, which are likely to be the new reality of trading with the EU after March 2019. The focus on the development of facilitations and technology-based solutions to simplify customs procedures is a step in the right direction.
However, in relation to the ‘new customs partnership’ proposal, it is unclear whether and how the UK can avoid the imposition of a customs border with the EU post-Brexit without remaining in the Single Market. It seems that this proposal envisages setting up two separate customs regimes: one for goods destined for the EU, and the other one for goods imported into the UK as a final destination. This could potentially increase, not decrease, the administrative burden on UK businesses, and it is unclear how this two-tier system would operate in practice.
In addition, in order for the EU to agree to such a proposal, the UK would need to ensure that a robust enforcement mechanism was in place to ensure that the UK was not used as a means to avoid the EU’s tariff levels for any goods on which the UK decided to impose a lower tariff than the EU. Similarly, the UK would need to ensure that the two-tier system is not used to avoid paying tariffs due on imports into the UK where goods are in fact destined for domestic consumption, but where falsely declaring that goods are intended to be transferred to the EU would enable one to take advantage of zero tariffs under a free trade agreement which the EU (but not the UK) has in place with the country of origin.
The Position Paper sets out a few ideas on how this could be done, including a tracking mechanism and a repayment mechanism, however, more thought needs to be given to the practicalities of the two-tier system and to the prevention of any abuse.
Both the streamlined customs arrangement and the new customs partnership will take time to negotiate. In recognition of this, the Position Paper proposes “a model of close association with the EU Customs Union for a time-limited interim period” in order to avoid a cliff-edge for businesses and individuals on both sides. The intention seems to be that a transitional customs union between the UK and the EU would be put in place, until such time as a full trade agreement is negotiated and implemented.
The paper does not specify the length of such a transitional arrangement, however, David Davis (Brexit secretary) said on 14 August that he expected it to last for a “shortish” period, most likely “two years, maybe shorter”. Given the time and effort involved in negotiating a free trade agreement (e.g. the EU-Canada agreement is still not in force, eight years after negotiations began), such a short period of time is very unlikely to be sufficient.
A transitional customs union may seem like a reasonable proposal to minimise the disruption to business in the immediate period post-Brexit - importantly, a customs union typically means that goods are traded between member countries on a tariff-free basis. However, it is worth noting that any customs union is nevertheless likely to involve the imposition of some additional customs formalities, not least because such an arrangement will presumably only apply to goods originating from the EU or from the UK (as the case may be), requiring exporters to satisfy the relevant rules of origin.
In addition, the Government’s paper noted that the transitional customs union would ensure that businesses only have to adjust once to a new customs relationship. This is questionable, especially in light of the fact that, as the Government has made clear on a number of occasions (including the present paper), the future trade deal with the EU will not involve a customs union, not least because the UK wishes to ensure independence of its trade policy (members of a customs union usually have a common trade policy, apply the same external tariff to imports from third countries, and are restricted in their ability to negotiate unilateral free trade agreements). As such, it is likely that, at the end of the transitional period, businesses will need to once against adjust to new customs formalities.
Finally, even a transitional customs union does not solve the problem of a cliff-edge post-Brexit which businesses potentially face, given that any such union is likely to cover trade in goods only. Many service providers, including financial institutions, have called for prioritising a more comprehensive arrangement, which also covers services as these constitute a very significant proportion of UK exports.
New Customs Bill
As announced in the Queen’s Speech, the Government proposes to introduce a new Customs Bill in the autumn, which will set out a new UK customs regime to be put in place by March 2019. This will also give the Government the necessary powers to operate standalone customs, VAT and excise systems post-Brexit. In preparation for the Customs Bill, the Government intends to engage with stakeholders on the Position Paper over the summer and publish a Customs White Paper.
A lot of retailers currently have a next-day delivery offering, which will be difficult to sustain if strict customs formalities are introduced post-Brexit. The Chief Executive of British Retail Consortium said that the Government needed to work hard to develop a system that did not lead to damaging delays at the border. Depending on the shape of the final customs arrangement, retail businesses may need to adjust their business strategy, logistics, and pricing arrangements. It may be necessary to acquire additional warehousing capacity, both in the UK and in the EU, to be able to process orders more swiftly and to be ready for customs clearance delays. Building strong working relationships with agents, distributors and other supply chain partners may become increasingly important. Such changes will require agile decision-making, including considering whether to pass any increasing costs relating to customs formalities on to consumers, and whether sourcing components and raw materials locally or from alternative jurisdictions may help achieve cost-savings.
It is clear from the Position Paper that the Government is very keen to reach an agreement with the EU on customs arrangements as early as possible. UK-EU trade is a very significant contributor to the UK’s economy; indeed, in 2016, UK imports from and exports to the EU totalled £553 billion1. As the two-year deadline is approaching, it is vital to afford businesses the certainty of trading conditions post-Brexit, so that they have confidence in the UK as an economy worth investing in. The Position Paper demonstrates that the Government’s objective is indeed to provide for more certainty.
However, to date, the message from Brussels has been clear: no discussions in relation to the future relationship between the UK and the EU will take place until sufficient progress is made on the terms of the orderly withdrawal. As such, unless the EU changes its mind and agrees to prioritise trade issues, the underlying uncertainty as to any barriers which may be imposed post-Brexit is unlikely to be resolved any time soon.
As with any negotiations, it is expected that both sides will need to compromise on a number of points, with the UK’s ‘Brexit bill’ certainly being one of the most contentious issues. It is likely that the EU will use the UK’s plea for a transitional arrangement as a lever to increase the UK’s financial obligations on Brexit. In this context, it is worth noting that David Davis has refused to rule out payments to the EU for the temporary customs union arrangement. It remains to be seen how this proposal influences the negotiations going forward.
For more information please contact James Lindop or Monika Zejden-Erdmann.
1 - ‘Balance of payments: Jan to Mar 2017’, ONS, June 2017