Brexit: The customs impact on UK businesses

Brexit: The customs impact on UK businesses

September 2016

© 2016 Grant Thornton UK LLP. All rights reserved | Draft

Contents

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Introduction 3Brexit: key considerations and challenges 4Brexit: opportunities for the UK 8Brexit models 9What should ‘you’ do? 11Our Services 12About Grant Thornton 13


Introduction

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Following the referendum vote on 23 June 2016, the UK has voted to leave the EU. Exactly when this will happen and how is not yet known. In the coming months, the UK will be expected to submit its withdrawal notice to the EU Council - under Article 50 of the Treaty on European Union (TEU) - to formally notify the EU of its withdrawal. The notification will trigger a two-year notice period and negotiations on the terms of a UK exit will begin. Until then, UK businesses should continue to comply with and trade under the existing Union Customs Code (UCC) that entered into force on 1 May 2016. Assuming that 'Brexit' does eventually happen, businesses need to: • assess the risks and opportunities that this poses for their supply chain • where possible, put in place plans to manage these changes, to ensure their activities run smoothly and mitigate the potential impact, and• take appropriate steps to prepare for the ‘unknown’.Unless there is a dramatic 'U' turn, it seems clear that, at some point in the future, the UK will leave the EU. From a UK business perspective such a move will not only present many challenges, but will also provide opportunities. The vote to leave will continue to create considerable uncertainty until the details of any agreement(s) are known. Businesses affected by Brexit will need to plan for that uncertainty and will need to understand the potential impacts. For this reason, a supply chain impact assessment is prudent and should help to provide some clarity in relation to a business’s exposure.We welcome the opportunity to discuss the potential challenges and opportunities of Brexitwith you.

Ben PriceCustoms [email protected]: 0207 728 3426

Adam TaylorSenior [email protected]: 0117 305 7843

© 2016 Grant Thornton UK LLP. All rights reserved | Draft 4

In the short term, it is unlikely that very much will change in terms of formalities relating to the movement of goods between the UK and the other EU Member States. However, post Brexit, the following are some of the potential implications for UK businesses: Introduction of a new UK customs law and regulationsAs part of the UK’s withdrawal from the EU, the UK will in all likelihood have to repeal the European Communities Act 1972, according to which the UK was obliged to implement and abide by European legislation. As such, new rules and regulations will need to be introduced to enable UK businesses to trade with the remaining EU Member States and with third countries (ie non-EU Member States).With so much drafting of new UK legislation, in what may be a short timeframe, the manner in which this change will be implemented will pose a significant challenge to both Government and business alike.

Re-introduction of customs formalities The movement of goods to and from the EU, without the need to complete customs declarations, may cease to exist. Customs controls could be re-introduced, adding further costs to businesses, with the associated need to invest time and resource in managing and completing the relevant customs formalities.

Brexit: key considerations and challenges


Imposition of tariff barriersAs a member of the EU, the movement of goods to/from other EU Member States takes place without the need to pay customs duties. As soon as the UK leaves the EU, customs duties may need to be applied on the import/export of goods to/from the remaining EU Member States, adding further costs to traders. While only indicative, according to the last Trade Policy review of the EU, undertaken by the WTO on 18 May 2015, average Most Favoured Nation (MFN) duty rates for agricultural goods stood at 14.6% and average MFN rates for non-agricultural goods stood at 4.4%. Imposition of trade barriers Tariffs are not the only barrier to international trade. In fact, non-tariff barriers, for example technical regulations, conformity assessments etc., are often more challenging. At present, UK and EU standards are aligned meaning that it is very difficult for the countries within the EU to raise non-tariff barriers between one another. While the standards that UK products adhere to are unlikely to change overnight, once the UK is outside the EU, EU

Member States would not be prevented from increasing non-tariff barriers to UK goods, provided such barriers complied with the World Trade Organisation (WTO) rules.If the UK opts to introduce different standards, there are also likely to be implications for businesses as goods may need to meet both UK standards for domestic sales and EU standards for sales in EU Member States.

Brexit: key considerations and challenges (cont’d)


Loss of access to common policies related to tradeThrough EU membership, the UK has access to various common policies in key sectors (eg mining, manufacturing, agriculture, etc.), which govern and apply common controls on the particular aspects of trade between the EU Member States. Brexit may require the UK to form new domestic policies relating to specific industry sectors and negotiate its own standards, terms and regulations with the remaining EU Member States.Loss of access to Free Trade Agreements EU membership brings additional benefits to international traders by offering tariff free access to various international markets through the network of bilateral trade agreements that are in force and those that are currently under negotiation.

Brexit may require the UK to negotiate its own new Free Trade Agreements (FTAs), which would require a significant investment of time and resource. The loss of access to the EU’s trade agreements would mean increased duty costs on imported products and increased duty costs for UK goods destined for overseas markets, which in turn could affect UK competitiveness.



Removal from the EU’s Generalised Scheme of Preferences (GSP)Currently, UK importers benefit from the EU’s Generalised System of Preferences (GSP). The removal of the UK from the EU’s GSP would increase costs for UK traders that source goods from countries which benefit from the GSP scheme. Importers will either have to bear these increased costs or pass them on to customers. Subsequently, this may impact upon the GSP beneficiary countries, such as Sri Lanka and Cambodia, and may increase the costs of their products imported into the UK. By the time that the UK negotiates its own trade agreements, and they come into force, overseas suppliers may have already turned to alternative export markets. Given the UK's pro-development approach to trade policy, it is likely that the UK would seek a replacement for the EU's GSP scheme. This would most likely focus strongly on the developing country members of the commonwealth, however, it would need to be WTO compliant and the UK would be required to secure a waiver. As such, the time scale for such a scheme is difficult to predict.

Impact on the Mutual Recognition Agreement(s) for AEOs between the EU and third countries The current Mutual Recognition Agreements (MRAs) between the EU Member States and third countries, such as China and USA, could potentially be at risk upon the UK’s exit from the EU. The UK would have to invest time and resource to negotiate separate agreements with third countries, and the remaining EU Member States, covering mutual recognition for AEO approved operators.For those businesses that are currently in the process of applying for AEO, we would advise that they continue with such applications. Until the UK actually leaves the EU, AEO approved operators will have access to the various benefits that AEO authorisation offers, such as customs simplifications and reduced guarantee requirements.A UK AEO scheme is likely to be implemented in the future and will be beneficial, particularly in a scenario where customs formalities are re-introduced between the UK and EU Member States.



Community Transit Currently, non-EU goods can be transferred between the EU Member States and the EFTA countries (Iceland, Norway, Lichtenstein and Switzerland),Turkey, Macedonia and Serbia, under the Community Transit procedure. Following the UK’s departure from the EU, the transfer of non-EU goods from the remaining EU Member States and the EFTA countries, may require the completion and submission of a customs entry. This may increase the time spent on the completion of customs formalities and potentially increase the cost to UK traders. Excise goods Although excise duty rates are essentially set by the UK (subject to EU limits), Brexit would impact the way businesses deal with the movement of excise goods under duty suspension.

Currently, UK businesses are able to use the Excise Movement and Control System (EMCS) (subject to authorisation) and benefit from the advantages this offers, such as the movement of excise duty suspended goods. Following Brexit, this type of movement may be subject to customs formalities, which may require additional time and again increase costs to businesses. Export controls During the last 20 years, the EU has increased its focus on the export of controlled goods, technology and activities. By being a member of the EU, the UK has contributed to drafting and shaping these policies and regulations. Post-Brexit, the UK may have to re-design its export control regulations and ensure they have sufficient qualified resources to monitor and control this area of the UK’s export policy.



Contrary to the key challenges that are listed in the previous pages, the UK will have the opportunity to design its regulatory framework and customs policies for the first time in over 20 years. Notwithstanding the introduction of the Union Customs Code (UCC) on 1 May 2016, HMRC could use Brexit as an opportunity to retain the EU rules which it considers facilitates trade, whilst redrafting those aspects that are deemed to be overly trade restrictive.Some potential examples include:• the re-introduction of the First Sale for Export (FSFE) principle• the use of a Free On Board (FOB) basis for Customs Valuation • withdrawal of the mandatory duty guarantee requirement• independent negotiations for Free Trade Agreement(s) with third countries.

Brexit: opportunities for the UK


The Union Customs Code set out significant changes for the Customs Special Procedures, such as the mandatory requirement for financial guarantees, as well as other non-quantitative requirements, for example the requirement to submit a Bill of Discharge (BoD) for End Use authorisations. Currently, some traders have customs special procedure authorisations that are 'community authorisations', meaning that UK businesses are able to benefit from their use in other EU Member States. Additionally, the implementation and management of customs authorisations are aligned between the UK and EU Member States. Following the UK’s decision to leave the EU, the UK would be responsible for designing and administering customs authorisations, which may or may not align with the EU’s authorisations. Although this could be a time consuming exercise, UK Customs Authorities would, within the limitations of international trade law, have the opportunity to design the future of their customs procedures, and decide the extent to which they facilitate rather than restrict international trade.

Brexit: opportunities for the UK (cont’d)


Brexit modelsThe customs impact that Brexit will have on UK businesses will ultimately depend on the future relationship it negotiates with the EU. The following are possible scenarios of how the UK could form its future trade relationship:The Norwegian model (European Economic Area Agreement)Under this model the UK would apply to be a member of the European Economic Area (EEA) and have full access to the EU single market. They would, however, have to adopt EU’s standards and regulations and would have limited ability to influence these. There would be no tariff barriers on trade in goods, however the goods must originate in the countries that are parties to the agreement. Additionally, the UK would not be free to pursue trade deals independently nor adopt its own regulations. As an EEA member, the UK would have to comply with the EU’s rules and restrictions on the four fundamental freedoms; movement of goods, workers and capital, as well as provision of cross-border services.

Turkish model (Customs Union) Although limited or no tariff barriers would apply to goods, some customs formalities would apply, which could require investment of time and expense. Unlike the EEA, under this model, the goods do not need to originate in the respective member countries. Under this type of arrangement, the UK would be required to implement EU external tariffs and would not have guaranteed access to third markets. The degree to which the UK would be bound by the four pillars of the EU would be determined by the negotiations. The EU and Turkey do not currently have free movement of people as part of the Customs Union.


Brexit models (cont’d)Swiss model (European Free Trade Association)Assuming that the UK and EU adopt this type of trade arrangement, they would have to agree a set of bilateral agreements (e.g. in relation to the free movement of persons, technical trade barriers, public procurement, etc.). The UK would have to accept the EU’s terms on certain EU regulations in exchange for full or partial access to the EU’s single market.

Free Trade Agreement (FTA) modelThe EU has already concluded numerous FTAs with third countries and is in the process of negotiating new FTAs, including Canada and South Korea. As an EU Member State, the UK has been party to these negotiations and has access to these agreements. Following Brexit, the UK could agree a Free Trade Agreement with the EU and other third countries independently. Trade barriers would be eliminated, however this can be a time-consuming exercise. Negotiation would be subject to the parties' willingness and appetite for negotiating and agreeing the terms of an FTA. It is worth noting that the agreements would also have to cover substantially all trade to be considered WTO compatible. In the interim and in the absence of any FTA, third county partners would have no choice but to raise the tariffs on UK goods to Most Favoured Nation (MFN) levels. While some products will be unaffected, exports of certain goods, where high MFN tariffs exist, could erode the competitiveness of UK exports.


Brexit models (cont’d)MFN model Currently, there is no trade agreement between the EU and certain third countries, such as China and the US. Traders pay full WTO trade tariffs and are subject to import controls. Should there ultimately be no agreement between the EU and the UK, UK businesses would be treated in the same way as other WTO member countries (without trade agreements) and be subject to the EU’s common external tariffs. This could impact UK businesses’ trading activities with the remaining EU Member States due to the increased duty costs such a change would cause.Hybrid modelUK politicians and officials have mooted the possibility of a UK specific model or “hybrid model” to cover the UK/EU trading relationship. While this may be possible and probably the most suitable option, any “hybrid model” is likely to have to follow the previous models set out above or would risk setting an awkward precedent for the other EU Member States. Furthermore, while the UK and EU are free to negotiate whatever terms they wish for their future trading relationship, they are constrained by wider international trade rules, for example those stemming from the World Trade Organisation. It seems unlikely that either party would seek to undermine these rules and any model that did would be unlikely to secure the required WTO waiver. UK membership of the World Trade OrganisationThe UK is a member of the World Trade Organisation (WTO) in its own right and through its membership of the EU. The UK will continue to be a member of the WTO post Brexit, however, it has for a number of years been represented in negotiations by the EU. As part of the EU, the UK accepts a share of commitments entered into by the EU for example in relation to tariff quotas. How the UK’s commitments will be unbundled from wider EU commitments is still somewhat unclear and could require negotiation with the other WTO members. While in practice it seems likely that the UK will be able to continue to benefit from WTO membership during these negotiations, it may be required to agree additional commitments or concessions as part of these negotiations, which may ultimately change the UK’s relationship with other WTO member countries


Preparing for and dealing with an eventual UK Brexit starts now. Affected businesses will want to understand what the likely impact of any customs changes will be on their respective business models, supply chains and profitability.While, in truth, no-one yet knows the true impact of Brexit, or the ultimate trading arrangements the UK and EU might agree, this does not mean that businesses should not begin the planning process. If you trade in the UK, or the UK is included in your supply chain, either directly or indirectly, or if your business operates in other EU Member States, you may wish to consider undertaking a scenario based impact assessment. Each business will be affected in a different way depending on the nature, volume and complexity of trade as well as the ultimate Brexit model that is agreed. How can we help?Although any change will not be immediate, we will be paying close attention to the negotiations so that our advice in this area reflects the very latest developments:Our team can help you to:• assess the impact of removal of any EU law rights• examine the business’s current supply chain to consider the impact of customs changes • review the business’s customs footprint in the UK market as well as in other EU markets• review the business’s existing customs procedures and assess the potential need to amend systems/procedures• represent you in any consultation that HMRC may initiate in relation to the UK’s exit from the EU.

What should you do?


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Brexit: The customs impact on UK businesses

Economy & Finance