BREXIT AND A FUTURE UK CUSTOMS SYSTEM: A · PDF fileBREXIT AND A FUTURE UK CUSTOMS SYSTEM: A BLUEPRINT FOR FRICTIONLESS TRADE John Longworth March 2017

BREXIT AND A FUTURE UK CUSTOMS SYSTEM: A BLUEPRINT FOR FRICTIONLESS TRADE

John Longworth

March 2017

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First published in Great Britain in April 2017 by Leave Means Leave

© Leave Means Leave 2017

© John Longworth 2017

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Introduction and summary

The UK trader currently enjoys free access to sell goods to EU countries without customs formalities and minimal licencing requirements. Trade with EU member states is mostly the same as trading within the UK – selling goods to a customer based in Berlin or Birmingham follows an almost identical process, with minimal procedures.

With the UK leaving the EU, this status quo in our customs arrangements will change – and these changes will have significant implications for UK businesses. If not addressed properly, these could result in costly administrative burdens, both for UK businesses and on the UK Border Control infrastructure. As this paper will demonstrate, there are a number of interlinked issues that are at stake for any changes to our customs arrangements with the EU – presenting challenges, but also a opportunities to strengthen the UK’s capabilities as a trading nation.

There are several aspects that must be considered for our future trading relationship with the EU, namely:

• The nature of customs checks in the UK;• The systems that would allow for reliable and swift clearance at the EU border

or in third countries;• The provisions for a new UK Customs Code.

This paper, created for the consideration of UK Government, will detail the current customs procedures that the UK has in place when trading with non-EU countries – as well as outline the means to ensure that future customs controls (with both EU and non-EU countries), are efficient and effective. There are a number of helpful measures that UK Government will have the opportunity to introduce and maintain, such as:

• Establishing Inland Clearance procedures, which would limit time delays on physical borders;

• Creating a ‘Trusted Trader’ system that would allow a greater number of companies to benefit from the faster customs clearance process that AEO firms currently use;

• Maintaining the tried and tested preference documentation system that allows for seamless clearance when goods enter countries with whom the UK has an FTA (the likely outcome of trade negotiation with the EU along with third countries);

• Using the forthcoming Customs Bill to address and improve aspects of the Union Customs Code that currently impact detrimentally on companies’ cash-flow provisions.

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Customs clearance: current procedure when goods leave the EU

The assumption for this paper is that the UK will be outside the EU Customs Union, as the UK Government has indicated its desire to sign trade deals with non-EU countries – which would necessitate diverging from the EU Common External Tariff. This means that the UK will be subject to tariffs on goods and services it sells to the EU, unless there is a tariff free trade agreement with the EU after the two-year Article 50 negotiations. Even if a future UK-EU Free Trade Agreement (FTA) does eliminate tariffs, since the UK will have left the Customs Union, goods entering the EU from the UK, and vice versa, will be subject to border checks.

Therefore, goods transported from the UK to a destination in the EU would, in the future, likely follow the present process for exports outside the EU. The steps for this process are set out below:

1.

2.

Traders who export goods to countries outside the EU (and for some cases, in the EU), must ensure they have the appropriate licences and paperwork where they are required. A licence may be needed to comply with specific regulations in certain areas, such as those in the list below (not exhaustive):

• Weapons/other goods and technologies with a potential military use or dual-use;

• Agricultural products and processed foods; • Exports of valuable antiques and works of art; • Exports of dangerous chemicals; • Live animals, meat and plants that may need licensing and health

inspection; • Medicines and controlled drugs and the chemicals used in their

manufacture.

When goods are transported out of the EU with the intent to permanently export those goods, the trader must first submit an electronic export declaration via the National Export System (NES), part of HMRC’s Customs Handling of Import and Export Freight (CHIEF) system. CHIEF records the declaration to Customs of goods by land, air and sea. It allows importers, exporters and freight forwarders to complete customs information electronically. There are several options for the exporter or a nominated 3rd party (e.g. Freight Forwarder/Customs Agent), to access the system via;

A Community Systems Provider; Internet e-mail; XML e-mail; Web form. In exceptional cases, the exporter may manually input a declaration via the HMRC National Clearance Hub, but they represent less than 1 per cent of all export declarations. NES gives 24/7, 365 days a year processing and all exports must be cleared positively before shipment.

It is a criminal offence to bring certain kinds of goods, or a certain value of goods across the EU border without customs clearance. Indirect exports (i.e. those moving from the UK but exiting in another Member State must be accompanied by a Movement Reference Number [MRN – see below]).

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3.

Indirect exports require additional documentation in the form of an Export Accompanying Document (EAD). These exports are now controlled under the EU wide electronic Export Control System which works alongside CHIEF as part of the NES. There are more tasks to complete to export outside the EU than within it and other documentary requirements may include;

• Export Licences• Technical documents such as certificates of conformity, certificates of

analysis; certificates of quality• Certificates of shipment (Evidence of removal)• Dangerous goods notes for road, sea and air transport• Veterinary health certificates for animal related products (e.g. dairy

foodstuffs like cheese)• CITES certificates (animal or plant related)• Vessel certificates especially for letters of credit

In the UK, an export declaration is submitted electronically to CHIEF and will include all the safety and security data required under the Export Control System (ECS). This will then be passed on to the EU ECS system. Once the declaration has been accepted by CHIEF, a Movement Reference Number (MRN) will be issued. This can be used to track the movement across the EU to exit.

Currently there are several basic steps in the CHIEF declaration process, following the initial declaration by the trader (or forwarder/declarant) as seen in the diagram below.

There is a legal requirement to present the goods at ‘the port’; this allows HMRC and the Border Force to carry out risk analysis, exercise controls (such as licence checks etc.) and inspect paperwork/goods if necessary.

Although it is usually the carrier/port operator who notifies HMRC of the arrival of goods, it is the trader’s responsibility to make sure it is done. The trader will receive an X2 (Entry Acceptance Advice) once the goods are presented.

A P2P allows “Permission to Progress” – in certain cases, with further post clearance checks required. The goods are then physically sent to their destination.

The trader should receive an S8 (Movement Departure Advice) immediately on export from the UK for direct exports.

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CUSTOMS DECLARATION PROCESS DIAGRAM

Forwarder/Declarant

Declare

Deliver to Frontier

Present/Arrive goods

Move goods

Export/Depart

Process

Accept x2

Control

Release P2P

S8 MovementDepature Advice

Customs (CHIEF)

Export Process

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Taken together, all the various declarations made on CHIEF currently total 90 million. If the current process was used for trade with the EU-27 countries, there have been some estimates that the number of declarations could increase to 390 million. The current CHIEF system is based on ageing technology and in anticipation of many legislative changes to international trade processes HMRC wants to ensure it has the right service platforms in place to ensure future changes are made at the right time, in the right way.

CHIEF currently processes all required declarations for goods entering and leaving the UK/EU which equates to over 67 million per annum, collecting £34 billion in duties and taxes. All customs duty collected at import into the UK is remitted to the EU, with 25 per cent being repaid to the UK to fund management and administration of the tax, post exit, the UK will retain 100 per cent of revenue collected.

HMRC figures to December 2016 reveal that the proportion of total exports to the EU over the past 18 months has ranged from 38 per cent to 51 per cent, and total imports over the same period has ranged between 45 per cent and 56 per cent. (Source: HM Revenue and Customs Overseas Trade Statistics. Note: 2016 data is provisional)

Using those figures as a guideline would see the volume of declarations to HMRC effectively double in number, something that CHIEF would not be able to cope with but which should be manageable under the proposed CDS programme from an IT infrastructure perspective.

CHIEF is due to be replaced by a new Customs Declaration System (CDS), due for delivery in early 2019, which raises some considerations in terms of ensuring its ability to handle a vast increase in customs declarations volumes.

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Customs clearance: current procedure when goods enter a non-EU country

Even in cases where the importer is responsible for paying duty on the goods in the destination country, the UK trader must provide the right documentation. Non-EU (‘third’) countries may have import duty regimes in place, but in some countries the company’s exports may qualify for a reduced rate of duty or be classed as duty free. The trader will need to provide evidence of the product’s origin to claim relief by completing a trade preference movement certificate form such as an EUR1, available from Chambers of Commerce and from HMRC. UK traders would need to consider the Rules of Origin that are applied to any Free Trade Agreement when applying for preference.

Terms such as ‘documentation’ and ‘certificate forms’ are in some respects misleading – as these forms are, for the most part, now digital. Over the last decade, there has been a digitalisation of nearly all documentation – save for a small number of countries that only allow paper forms. These documents are provided in a competitive marketplace, overseen by government departments (HMRC, DIT), as well the British Chambers of Commerce, and UK businesses have a range of documentation providers they can choose from. The current arrangements are considered best-in-class around the world – and help guarantee the reputation of UK business in export markets, where the importer can rely on the UK supplier providing documentation that ensures swift customs clearance when entering their country.

Some countries require a Certificate of Origin showing in which country goods are manufactured/produced in under non-preferential rules of origin quoting the European Commission law (these are also available from Chambers of Commerce). For instance, many Arab countries require exporters to supply an Arab-British Certificate of Origin with each shipment of goods. The certificate must be authorised by the Arab-British Chamber of Commerce, via Chambers of Commerce across the UK. Special Preference Certificates (ATRs) cover trade with Turkey.

In some circumstances, such as when the value of goods is below a specified amount, the preference declaration can be made on the commercial invoice for the goods. A trader can apply to become approved to make their preferential origin declarations on

invoices for consignments of any value.

Traders that wish to temporarily export goods from the EU, for example, samples for an exhibition, can do so by using a temporary export Customs Procedure Code (CPC) in the declaration to the National Export System, or move the goods under an ATA Carnet. ATA Carnets are provided by London Chamber of Commerce, via Chambers of Commerce across the UK. The ATA carnet will simplify the export and temporary import of goods into a country of destination. This type of carnet is valid in most major countries and will enable deferment of up to a year of import duties that might otherwise have applied.

A trend with recent trade agreements is to build in systems that depend on organisations reaching Authorised Economic Operator (AEO) status. Whilst this status significantly helps reduce customs-based controls, the process for obtaining it –resource-intensive, with onerous requirements – disadvantages small and medium sized companies. In addition, HMRC has limited capacity to process applications from companies seeking this status; according to HMRC itself, just over 500 companies have qualified for AEO

to date.

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Moving to World Trade Organisation (WTO) rules

The UK joined the WTO as an original member and not as a member of the EU, as such it remains a WTO member and retains the rights and obligations of WTO membership (i.e. Most Favoured Nation (MFN) rate for goods exported from the UK to non-EU territories).

Under the WTO MFN agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you must do the same for all other WTO members. Some exceptions are allowed, for example, countries can set up a Free Trade Agreement (FTA) that applies only to goods traded within the group.

MFN means that every time a country lowers a trade barrier or opens up a market, it must do so for the same goods or services from all its trading partners.

Once we have left the EU, goods traded with EU countries will be treated as imports and exports, rather than intra-community sales, and will be subject to full customs documentary requirements. This will require additional import and export declarations, a function often outsourced to a freight forwarder which may incur additional costs, and could mean that duty is payable on those movements.

On leaving the Customs Union the UK will be free determine its own duty rates.

Customs controls for EU movements at the UK border will also need to be reviewed which may result in additional clearance costs and potential delays. Any impact is of course dependent on the deal agreed with the EU.

Considerations on Brexit

It is assumed that the UK Government would work with the EU in a constructive manner in matters of international trade, to ensure both the EU and UK continue to benefit from the freest possible terms of trade with each other. As an absolute minimum, systems need to be in place before the moment of our formal exit from the EU, or any negotiated transition period for customs arrangements, to ensure that trade can continue without undue obstacles. Industry must be consulted and forewarned of any changes to trading arrangements as far in advance as possible, to enable businesses to

make relevant changes without incurring heavy costs or sharp adjustment challenges.

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Goods undergoing customs checks in the UK

In terms of customs clearance in the UK, efforts must be focused on using technology to deliver a ‘frictionless’ or ‘virtual’ border: an example would be the way licence plate scanning technology can be used to pay tolls without the need for vehicles to be held up. Using this, customs registration can be done electronically in advance of trucks crossing a border. It is likely that there would remain some physical controls, with computer programmes helping to assess and manage risks.

If necessary, checks could be more discreet at a roadside station, as in many cases ports have little space to carry out additional inspections. The goal of this ‘Inland Clearance’ would be to decrease the administrative burden, both on the exporter and on customs controls, whilst recognising that there is likely to be some increase in physical inspections. Customs duties could be accounted for in a manner similar to VAT, whereby return and payments are made in arrears.

Export Processing Zones (also known as Free Trade Zones and free ports) can play a long term dynamic role in the UK’s trading process and in developing local areas near key port facilities – if they are appropriately set-up, well managed, WTO compatible in their incentives, and used as an integrated part of national reform. Configured appropriately at UK ports and airports, they would allow cargo to be reconfigured or processed and then shipped onwards outside of the UK without the need for UK customs clearance – or alternatively brought into the UK for customs clearance at a later stage, once processing has been completed.

Of particular relevance for the border on the island of Ireland is the consideration that those vehicles that belong to transport companies that have been accredited to the Transports Internationaux Routiers (TIR) System can avail of the harmonised international convention that allows goods to travel through multiple countries without losing time with lengthy customs procedures. At the outset of a journey, the cargo is sealed in a container, or approved load compartment, displaying the TIR plaque and is protected with a customs seal. Customs officials then only need to check the customs seals, and the external conditions of the load compartment and the accompanying TIR Carnet. Paperwork is more easily managed as all transit declaration information is contained in a single document, the TIR Carnet, as well as electronically, in advance, with TIR-EPD (Electronic Pre-Declaration).

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Goods undergoing customs checks in other countries

In terms of customs clearance outside of the UK, based on the current procedures as outlined above, we would recommend the following three-route approach to facilitate UK-EU trade in the future – as well as provide continuity for businesses in trade around the world:

1. Authorised Economic Operators (AEO)

Some form of self-assessment (this introduces notification and payment of customs duty on a periodic basis. Businesses to calculate customs duties and other import charges themselves and retain the customs declaration data within their commercial records), ‘pre-clearance’ (before goods are given documented permission to leave the country) and ‘post-reconciliation’ (after the necessary forms have been filled in by the trader), would be needed to support the virtual border concept, so as to shorten the current customs declaration process set out above.

As mentioned earlier, some elements of a faster customs clearance process (both in and outside the UK) are available to Authorised Economic Operators (AEO). This status has useful benefits, particularly for multinational companies with long supply chains, but as mentioned previously, the accreditation system for AEO is difficult and onerous – particularly for SMEs.

2. ‘Trusted Trader’ regime

HMRC are currently reluctant to provide faster pre-clearance and post-reconciliation facilitations to traders that do not have AEO status, citing risk issues and risk appetite. It is possible that a trusted third party – such as Chambers of Commerce – could oversee a new ‘Trusted Trader’ accreditation process, which would assist more traders – particularly SMEs – to achieve an accredited status that gives them permission to avail of these customs facilitations. Adjusting to the new level of custom checks with the EU will impose a significant strain on businesses – and all efforts must be made to facilitate seamless yet reliable checks for traded goods.

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3. Shipment-based, preference documentation

One aspect to consider is that if the UK agrees an FTA with the EU, it will need to apply rules of origin, to distinguish between goods originating within the UK and those from ‘third countries’ (non-EU countries). The implications of rules of origin would need to be considered for those traders with complex supply chains presently straddling EU member states and beyond – with respect to the ‘mix’ of components that would allow for a finished product to be counted as having UK origin, and therefore benefitting from the terms of a future FTA that the UK may agree with the EU.

With the likelihood of much procedural and technical change, it would seem sensible to retain as options the tried and trusted mechanisms already in place, such as the use of preference documentation, which helps exporting firms benefit from the terms of an FTA, or prove origin for countries that require such information. The widespread and long-standing use of these documents ensures certainty in international supplier-customer relationships, as well as a fast turnaround when it comes to issuing the documentation and passing customs controls. Chambers of Commerce stand ready to assist Government in designing an independent, UK preference documentation system that serves businesses with overseas customs clearance. Preference documentation should be an option under any grandfathered FTAs, any new EU FTA, or any new FTAs conducted with third countries.

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A new UK Customs Code

In addition to the above, the UK’s process of exiting the European Union raises the need to create a UK Customs Code. Whilst it is sensible to base the future UK Code on the Union Customs Code (UCC) – to which businesses are now adapting – this shift also presents an opportunity to change several elements of the Code at the margin that would significantly simplify cross-border business for UK firms in future.

The current situation provides a perfect opportunity to revisit these themes and ensure the future system lowers costs, reduces regulatory burdens, and provides support for businesses:

• Reintroduction of ‘earlier’ sale – This would allow importers to value goods based on the previous sale in a supply chain before import. This will simplify the valuation of goods at the border for tariff purposes generally resulting in lower duties being paid. Under the new rules, it is the first sale after import that sets the value leading to excessive duty being paid.

• Removal of compulsory guarantees – Prior to the introduction of the UCC, HMRC could waive the requirement for businesses to guarantee duty that might become liable. The introduction of compulsory guarantees has had serious cashflow implications for traders.

• Reduction of the 120 days allowed to issue a customs guarantee – The current statutory timescale which allows HMRC 120 days to issue a guarantee is a significant issue for business who require HMRC to make dynamic decisions. As such, it is important that this statutory timescale is reduced to a more business-friendly level.

• Reintroduction of Inward Processing (IP) Drawback – IP drawback allowed traders to import goods into the IP procedure, pay duty at import, and reclaim the duty when the goods are exported. IP drawback allowed traders a greater degree of flexibility than IP suspension, and meant as the duty was already paid at import, this provided minimal fiscal risk to the customs authority.

• Reintroduction of VAT deferment accounts – Previously when goods were imported into the UK the VAT due could be deferred then offset against a business’ VAT return. This had significant cashflow advantages for business.

• Developing our own Market Access Database – The EU offers its importers and exporters access to the Market Access Database: a tool that is used by importers and exporters to understand what requirements they must comply with to ensure that they can trade. The UK should set up its own comprehensive Market Access Database, provided by a trusted third party.

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Conclusion

As this paper has demonstrated, there are numerous considerations involved in the development of our new trading and customs relationships with the EU:

• The nature of customs checks in the UK;• A system that would allow for reliable and swift clearance at the border with the EU

or a third country;• The provisions for a new UK Customs Code.

The fact that the UK currently has robust and longstanding systems in place for aspects such as export documentation, as well as the opportunity to streamline customs procedures on our own terms, means that UK Government can immediately implement several procedures to facilitate our trade with the EU and the rest of the world, namely:

• Establishing Inland Clearance procedures for imports, which would limit time delays on physical borders;

• Creating a ‘Trusted Trader’ system that would allow a greater number of companies to benefit from the faster customs clearance process that AEO firms currently use;

• Maintaining the tried and tested preference documentation system that allows for seamless clearance when UK goods enter countries with which the UK has FTAs;

• Using the forthcoming Customs Bill to address aspects of the Union Customs Code that currently impacts detrimentally on companies’ cash-flow provisions.

Customs clearance procedures, both within the UK and at the border with other countries, are an issue of critical importance to businesses – and one that many are far more concerned about than any potential future tariffs with the EU.

However, the UK should not be daunted by the measure of the task ahead, as the measures outlined in this paper would go a long way towards not only addressing immediate challenges, but also facilitating more effective trade in the future.

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