How do we know what to prepare for?
Officially the UK will leave the EU on 29 March 2019, and a transition period has been agreed to 31 December 2020. With time running out, we still do not yet have clarity regarding the future shape of Brexit. Obviously business must prepare – but for what exactly?
At time of publication (2 July 2018), it looks increasingly likely that we are heading for a no-deal scenario.
In this article we explore scenario planning from a customs perspective. We discuss steps that business can take now to mitigate potential costs and disruption in a post-Brexit supply chain.
Where are we in negotiations?
Negotiations are underway between the UK and EU. The parties meet in Brussels approximately once per month to discuss the ‘disentanglement’ and our future relationship with the EU.
At the time of writing, there is national political disagreement about the future shape of Brexit. In October 2017, Theresa May published a Customs Bill which talked of a partnership with the EU. However, Hard Brexiteers are publicly fighting for nothing less than full independence. It seems that the PM is trying to convince her cabinet to find a middle ground. There are plans to publish an additional white paper ahead of a key EU summit on June 28.
For more detail regarding the timeline and status of negotiations, please see my article – A Brief History of Brexit
What are the possible post-Brexit scenarios?
The ‘default’ scenario
This represents the possibility that we trade with the EU27 on World Trade Organisation (WTO) terms. Essentially this means that we treat the EU just as we do non-EU countries, and vice versa. This is the scenario of most change and theoretically what will happen if we leave the EU with no deal agreed.
It is also the baseline scenario if the Hard Brexiteers manage to achieve full independence from the EU. WTO terms would be the starting point from which changes can be made, such as introducing trade agreements, reducing or suspending duties, and changing the system of reliefs from duty and import taxes.
A major sticking point is that this may necessitate a hard border between the UK and Ireland. It is both government and EU policy that no such border will be created. The EU suggested an interim arrangement in which NI stays inside the EU, so that any hard borders lie within the sea. The UK is not happy with that proposal, but the alternative seems to require a hard border in Ireland.
The ‘partnership’ scenario
The UK government published its Customs Bill in October 2017. This shows us the government’s desired ‘direction of travel’ for managing customs post Brexit.
- A highly streamlined customs agreement, or
- A new customs partnership with the EU.
We expect a third customs model to be announced in early July 2018 in the form of a white paper.
We should note that the proposals are light on detail and we are awaiting the secondary legislation. Officials tell us that the aim is to have this in place by March 2019. Apparently this secondary legislation aims for the same outcomes as the Union Customs Code* (“UCC”), but it will be different from the UCC. We expect to have the opportunity to consult on drafts.
How would we manage customs if we leave with no deal?
Basically, we would revert to the internationally agreed rules of trade. Most countries in the world have signed up to agreements created by the WTO. Each signatory country agreed to basic rules about how to trade fairly. One such rule permits the signatories to charge reasonable import duties – to a maximum ‘bound’ rate. It is possible for the UK to revert to these rules in its trade with the EU27, just as it already does when trading with the rest of the world.
Once we leave the EU, any movement of goods between us and the EU27 will require a customs declaration. In this scenario, HMRC estimates that the number of customs declarations may rise from 55 million per year to approximately 255 million per year. Less conservative estimates have this top level at 350 million declarations per year. Approximately 180,000 traders would make customs declarations for the first time.
The civil service is preparing its systems to cope. They are also consulting with trade and actively trying to overcome issues – examples include port and road infrastructure and capacity. The effort expended by the government suggests that this scenario is a genuine prospect.
Whilst the government is clearly taking this possibility seriously, most businesses are not yet prepared to start making these additional customs declarations in March 2019. Even if the customs declaration system itself is ready, there are massive challenges to overcome and a huge skills shortage in the UK. Customs professionals like myself expect that implementation of the changes required will take at least a few years more than the current transition period allows.
What might a ‘highly streamlined customs arrangement’ look like?
Theresa May indicated in her Florence speech that a similar deal to Norway would represent “a loss of democratic control”, while one similar to that with Canada would be “a restriction on our market access”. It seems that the UK government is aiming for something in-between.
Unfortunately, the EU may view this as an attempt to “have our cake and eat it”. We should expect the EU to fight hard to protect its principle of ‘four freedoms’ – and its budget. It will also want to demonstrate that membership of the EU is superior to being on the outside.
In my opinion, some sort of partnership agreement is ambitious but possible – albeit eventually. On the day of leaving the EU, we will have very similar law as well as systems and processes that the EU previously found acceptable. With enough motivation, trust and coordination, we could achieve near-frictionless trade. However, if it were to come about, it would either take a very close partnership – almost on a par with membership of the EU itself – or many years to agree. The recently agreed deal between the UK and Canada took 8 years from start of formal negotiations to come into force, and does not go far enough to eliminate the need for customs declarations. This type of agreement has not been done before anywhere in the world.
What can we do now to prepare?
We may not know for certain that we will trade on WTO terms come 1st January 2021, but this is what we should plan for. It is the default position if we leave without a deal and it is also the scenario of ‘most change’.
You could take the following actions:
- calculate the potential costs of leaving under WTO terms,
- anticipate potential disruption in the supply chain,
- identify remedial actions. There may be customs reliefs or authorisations that can help. You may also be able to make changes to your supply chain to mitigate some of the impact.
- identify your ‘critical-path’. How long can you afford to wait before taking key actions?
- get involved in shaping Brexit. The government is consulting stakeholders and is particularly interested in the views of smaller business.
How can customs procedures and authorisations help?
By anticipating potential disruption in the supply chain, we can identify remedial actions. This might involve some changes to the supply chain itself by changing the location of a distribution hub or changing the terms of trade. Alternatively, you may be able to use a customs procedure or authorisation to replicate the benefits of the single market. Some businesses even find missed opportunities to reduce costs when they take the time to look at current customs management.
It is fairly safe to assume that the existing customs procedures and authorisations will continue to apply post Brexit, albeit these may change in the longer term. Some useful procedures and authorisations are as follows:
Inward Processing (IP)
IP allows a company to import goods under duty suspension (to delay the payment of duty and tax). The company can process or manufacture finished goods using the imported goods. It can then export those goods without paying the duty on the original imported parts. These benefits can be passed along a supply chain.
Example: Manufacturer A buys widgets from a supplier in France, it sells its finished product to a bigger UK business, which exports all over the world.
Under WTO terms, the widget may attract 5% duty. Business A can either absorb the duty cost or try to pass it onto its customer. The customer, in turn, may decide to simply cut out the middle man and go to a different supplier in Europe. That’s because the bigger business may already use IP, and won’t have to pay the duty at all. Alternatively, the UK manufacturer/supplier has to learn about IP and start using it fast.
Customs Warehousing (CW)
CW allows for storage of goods with duties and taxes suspended. Once goods leave the warehouse, duty must be paid unless the goods are re-exported or moved to another procedure.
Example: Company B buys from suppliers in the EU27. It has a warehouse in the UK, from which it distributes to customers in Europe and the rest of the world.
Under WTO terms, the goods may start to attract import duty. The retailer may have never made a customs declaration before and now faces significant additional costs, not only on import into the UK, but again when customers import back into the EU27. By using customs warehousing, only the goods destined for customers in the UK will attract import charges in the UK. Alternatively this business might want to consider its distribution process.
Authorised Economic Operator (AEO)
AEO is an internationally recognised quality mark which shows your customs controls and procedures are adequate and compliant.
It isn’t compulsory but it already has benefits for holders – mainly in reduction of guarantees required. Soon, there may be a substantial new benefit because HMRC is exploring the possibility of self-assessment. Self-assessment may mean that AEO holders do not need to make customs declarations in the traditional way. With a potential seven-fold increase in the number of declarations required under WTO terms, this could be hugely important.
The above is just a taste of some of the procedures and authorisations available. What works for your business will depend on your supply chain, your business model and your industry sector.
Where can I find more help and information?
Feel free to contact us for a free consultation.
See related articles:
UCC – Union Customs Code. The EU customs legislation to which we are bound in the UK until the end of the transition period.