Documents considered by the Committee on 18 April 2018 Contents

7Union Customs Code: electronic systems

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny; further information requested; drawn to the attention of the Home Affairs, the International Trade, and the Treasury Committees

Document details

Proposal for a Regulation amending Regulation (EU) No 952/2013 to prolong the transitional use of means other than the electronic data-processing techniques provided for in the Union Customs Code

Legal base

Articles 33 and 207 TFEU; ordinary legislative procedure; QMV

Department

Revenue and Customs

Document Number

(39530), 6235/18, COM(2018) 85

Summary and Committee’s conclusions

7.1The legal foundation for the operation of the EU’s Customs Union vis-à-vis goods entering from other countries is the Union Customs Code (UCC).134 It was adopted by the Member States and the European Parliament in 2013, and foresaw the upgrading or creation of various new electronic systems by the end of 2020 to automate the operation of the Customs Union and eliminate the need for physical paperwork when exporting goods to or from the EU.

7.2In March 2018 the European Commission proposed to delay the legal deadline for implementation of seven of the UCC’s electronic systems in view of the difficulties encountered in the preparatory process.135 Instead, they would be allowed to become operational by the end of 2025, with paper-based processes valid until the new systems go live. The Financial Secretary to the Treasury (Mel Stride) has confirmed the Government supports pushing back the deadline,136 although the substance of the UK’s customs arrangement after its scheduled exit from the Customs Union by the end of the post-Brexit transitional period, and therefore HM Revenue and Custom’s access to the various UCC systems, remain unclear.

7.3We are content to clear the proposal on delaying the full digitalisation of the Union Customs Code from scrutiny, given it makes no substantive changes to the Code itself.

7.4The processes and systems established by the Union Customs Code apply only to movements of goods between the EU and third countries, as intra-EU customs controls have been abolished as part of the Single Market (and not as a function of the Customs Union per se).137 Given the Government’s policy is to leave the Single Market and the Customs Union at the end of the post-Brexit transitional period, the delay in the establishment of the speedier electronic customs processes would have an impact on British businesses trading with the EU when the UK assumes ‘third country’ status. When those new, automated processes are fully operational, UK traders would benefit from them on the same terms as those from any other non-EU country. Given the volumes of UK-EU trade and the complete lack of customs controls at present, the Government has also rightly prioritised the conclusion of a customs cooperation agreement with the EU to further reduce formalities, checks and delays as much as possible when the UCC becomes applicable to flows of goods between the UK and EU Member States.

7.5However, as the Home Affairs138 and Public Accounts Committees concluded late last year,139 there is still no detailed clear prospectus from the Government about its desired customs arrangement with the EU to mitigate the impact of customs controls on trade. Under the draft Withdrawal Agreement presented by the European Commission in spring 2018, the UK would stay in the Customs Union — and therefore apply the UCC — until the end of December 2020.140 After that, barring any legal agreement to the contrary, the UK would no longer be bound by the Code; customs checks would take place on trade in goods between the EU and the UK, with tariffs applied; and HM Revenue and Customs would lose access to the EU’s electronic customs systems and databases.141

7.6The Government has proposed two different options for the post-Brexit customs arrangement with the EU to minimise the need for customs checks on trade in goods:142

7.7It remains unclear which of these is the Government’s preferred option, although it was recently reported in the press that talks have begun on the ‘customs partnership’ — by far the more ambitious of the two approaches outlined in the Government’s policy paper.144 It would require HMRC to continue applying the Union Customs Code and supplementary legislation indefinitely in parallel to any new UK Customs Code, without having any formal input when future amendments are considered. This would, presumably, also require the UK to remain part of all the new and enhanced electronic customs systems being implemented as part of the Union Customs Code. In any event, no customs partnership — however deep — would address non-customs related border checks, such as official controls on animal products, which EU Member States will have to perform on UK goods entering the Union (including via the border with Ireland).

7.8The need to delay implementation of some of the electronic systems underpinning the Union Customs Code also shows the need for a realistic timetable for any new UK-EU customs cooperation agreement to be put in place. The UCC was agreed in 2013, meaning some of the new IT infrastructure — if delivered by the end of the proposed new deadline in 2025 — will have taken twelve years to complete. Moreover, the Commission proposal also notes that “Member States and businesses need on average two years to make arrangements for each electronic system”.

7.9The UK’s exit from the Customs Union and the Single Market would present a technical and logistical challenge for both Government and businesses on a much larger scale, given that it entails the disentanglement from forty years of legal and regulatory entwinement. Given the need for UK and EU businesses to adapt to the new trading environment, they would need clarity by the end of this year at the latest about the nature of the post-Brexit frameworks for trade once the current regime, underpinned by shared EU membership, falls away. The more ambitious the agreement, the more extensive the necessary preparatory work will be. HM Revenue and Customs itself has said the new customs arrangements might take up to five years to implement,145 and the Prime Minister herself recently conceded that it might take longer than initially stated by the Government.146

7.10However, any implementation timetable for cooperation between the EU’s customs authorities and HMRC obviously first requires an agreement with the EU on its scope and depth. Negotiations on a new customs cooperation agreement that minimises friction by reducing the need for inspections, while being outside of the Customs Union and the Single Market, will be complex and require a large degree of trust between the customs authorities involved. The UK’s exit from the Customs Risk Management System (CRMS)147 means it will no longer be part of the EU’s “common risk criteria and standards, control measures and priority control areas”. More generally, the UK’s domestic customs processes after Brexit will — in the eyes of the EU’s customs authorities — be untested, and their ability to cope with the larger volume of customs activity unknown. This means that, in the absence of a comprehensive legal agreement on customs cooperation, EU customs authorities may initially have to apply a relatively high proportion of inspections to UK exports as part of their obligations pursuant to the Union Customs Code.148

7.11With respect to the robustness of the UK’s post-Brexit systems, mutual trust may already be in short supply even while the Article 50 negotiations are still in progress. The Government is currently involved in a dispute with the European Commission about large-scale undervaluation of imports of Chinese textiles at UK ports since 2013. The fraud has allegedly led to a loss of customs duties — which are normally transferred to the EU budget — amounting to €2.7 billion euros (£2.4 billion).149 The dispute recently escalated to the first step of a possible formal infringement procedure against the UK, when the Commission issued a ‘letter of formal notice’ in March 2018 asking for compensation from the public purse for the EU’s lost income.151 An outstanding dispute of the size and scale of the Chinese undervaluation fraud will not improve trust among EU Member States and the EU institutions that HM Revenue and Customs can apply customs controls effectively.

7.12Given the time pressures and the complex nature of upcoming UK-EU trade negotiations, both technically and politically, it is worrying that the Government has, in public, provided only a vague outline of the new customs arrangements it is proposing. As of April 2018, the Government and the European Commission are apparently yet to begin the detailed technical negotiations on the new customs cooperation agreement. Under these circumstances, we share the Prime Minister’s own doubts that a new regime sufficiently deep to minimise or eliminate the need for customs controls between the UK and the EU will be operational by December 2020. The possibility that no new customs arrangement will be ready for operation by the end of 2020 points to either an abrupt ‘cliff edge’ in the trade relationship between the UK and the EU at the end of the transitional period, with the attendant disruptive effect on bilateral trade in goods, or an effective extension of UK membership of the Customs Union and the Single Market.152

7.13In light of the above, and given the uncertainty about the UK’s post-Brexit customs arrangements with the EU beyond the end of the transition period, we ask the Minister to clarify:

7.14With respect to the future customs arrangement, our main focus is the potential for continued long-term legislative and regulatory alignment with the EU after the UK has left the Customs Union. We therefore urge the Government to publish without delay its detailed proposals for either of the options set out in its “future partnership paper” on customs. We also ask the Minister to write to us by 11 May 2018 to clarify the following points:

7.15Given their interest in the UK’s post-Brexit customs regime, we also draw this proposal to delay implementation of parts of the Union Customs Code to the attention of the Home Affairs, International Trade, and Treasury Committees.

Full details of the documents

Proposal for a Regulation amending Regulation (EU) No 952/2013 to prolong the transitional use of means other than the electronic data-processing techniques provided for in the Union Customs Code: (39530), 6235/18, COM(2018) 85.

Background

7.16The Union Customs Code (UCC) entered into force on 30 October 2013, with application in its entirety from 1 May 2016.153 The UCC requires national customs authorities of EU Member States to take a risk-based approach to inspections of goods. It applies only to goods entering from non-EU countries, as intra-EU customs controls were abolished as part of the Single Market in 1992.

7.17The Union Customs Code does not cover all types of controls that are carried out at the EU’s external borders on goods entering its Member States. Regulatory checks as part of the Single Market — such as official controls on animals and animal products154 and phyto-sanitary checks on wood products — are outside its scope. Similarly, tax-related border controls on value added tax155 and excise are governed by separate pieces of EU legislation.

Introduction of electronic customs systems

7.18The Code provides that different customs processes should be covered by electronic systems. Article 278 of the UCC provides transitional arrangements allowing for the use of electronic and paper-based systems that pre-dated the introduction of the UCC until 31 December 2020 in cases where the electronic systems envisaged under the Code are not yet operational. However, the December 2020 deadline has proven to be challenging for many Member States.

7.19In recognition of the delays and difficulties encountered in delivering some of these electronic systems in time, the European Commission has now proposed an amendment to postpone the end of transitional arrangements in relation to seven of the electronic systems until 31 December 2025 at the latest. The seven systems include three entirely new ones, designed to support new features of the EU customs system introduced by the UCC, and improvements to four existing IT systems that were already in operation under the previous Community Customs Code. The systems affected are:

The Government’s view

7.20The Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the proposal on 20 March 2018.156 It notes the Government’s agreement with the Commission that there is a need to “allow an extension of the delivery timetable” for the implementation date for the full complement of electronic systems required by the UCC. He adds that a “decision (…) on implementation of any of these electronic systems in the UK will depend on on-going EU Exit negotiations”.

Previous Committee Reports

None, this is a new proposal.


135 See Commission document COM(2018) 85.

136 Explanatory Memorandum submitted by HM Revenue and Customs (20 March 2018).

137 Membership of the Customs Union (CU) is a prerequisite for the abolition of internal customs controls, but the process is not automatic. The CU came into operation in 1958, but intra-EU customs controls were not abolished until 1992 when new Single Market legislation came into effect to create ‘true’ free movement of goods. Thus, while the EFTA-EEA countries face no regulatory border controls on exports of goods to the EU (because they adhere to all the relevant regulatory standards), customs, VAT and excise controls remain in operation along the Norway-Sweden border.

138 Home Affairs Committee Report, “Home Office delivery of Brexit: customs operations“ (7 November 2017).

139 Public Accounts Committee Report, “Brexit and the future of Customs“ (14 November 2017).

140 DExEU, “Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community” (19 March 2018).

141 European Commission Notice to Stakeholders, “Withdrawal of the United Kingdom and EU rules in the field of customs and indirect taxation“ (30 January 2018).

142 Customs partnership.

145 Oral evidence by HM Revenue and Customs to the Treasury Committee, 14 September 2017, Q17.

146 On 27 March 2018, the Prime Minister told the Liaison Committee: “As we get into the detail and look at the [customs] arrangements, what becomes clear is that sometimes the timetables that have originally been set are not the timetables that are necessary when you start to look at the detail and when you really delve into what it is that you want to be able achieve. It is important that we have been able to get on to that point of looking in that greater practical, pragmatic detail at what it would take.”

147 The CRMS distributes and exchanges customs control and risk-related information directly among EU customs officials and risk analysis centres. It consists of a Risk Information Form (RIF) which is filled in on-line and instantly made available to all customs offices.

148 Article 46 of the UCC requires customs authorities to base their controls “primarily (…) on risk analysis using electronic data-processing techniques, with the purpose of identifying and evaluating the risks and developing the necessary countermeasures, on the basis of criteria developed at national, Union and, where available, international level”.

149 €1 = £0.88415 or £1 = €1.13103 as at 28 February.

152 As we have noted elsewhere, the same ‘cliff edge’ implied by the UK’s exit from the Single Market will be more disruptive, especially if the Government and individual businesses cannot secure all the necessary permissions and licences that ‘third country’ products need to be sold in the EU by the end of the transition. Whereas customs formalities can delay shipments, EU Single Market law means that many UK goods will not be permitted onto the EU market until all the relevant pre-conditions for ‘third country’ goods are met.

154 See Regulation 2017/625 on official controls. It will replace the current legal framework for such border controls in December 2019.

155 For more information on EU VAT law and its implications in the context of Brexit, see our Report of 28 March 2018.

156 Explanatory Memorandum submitted by HM Revenue and Customs (20 March 2018).




Published: 24 April 2018