Home Office delivery of Brexit: customs operations Contents

3Brexit negotiations—transition and the implications of ‘no deal’

20.As previously noted, the Prime Minister has indicated that she wants the UK “to have a customs agreement with the EU”. The Government has further stated that it is seeking a “deep and comprehensive” free trade agreement with the EU which will allow for “the freest and most frictionless trade possible in goods between the UK and the EU”, whilst allowing the UK to negotiate its own trade agreements with third countries.22 The EU’s position is that frictionless trade outside the Single Market and the Customs Union is not possible; and the European Parliament’s coordinator on Brexit, Guy Verhofstadt, went as far as to say that it was “a fantasy”.23 There are also specific concerns around the future operation of the border between Northern Ireland and the Republic of Ireland (see Chapter 4), and the maritime border between Wales and the Republic of Ireland, that have been raised by the Government, the European Commission and the Irish government.

21.The IfG report states that “there is no pre-existing model of relationship with the EU which would completely mitigate disruption and the need for border checks”. The agreements which the EU has with most of the its major trading partners, including Canada, Japan and the USA, seek to facilitate customs arrangements but they do not remove “friction”. So the UK would be seeking an agreement with the EU which is different from anything previously achieved by a third country.24

22.The NAO notes that a “bespoke” trade deal of the kind the Government is seeking might require new or amended border arrangements; and such agreements might allow some products to be sold in the UK, or exported from the UK, which are not currently permitted under EU regulations. It points out that these changes might also bring opportunities to improve the use of data and technology, including streamlining the way in which importers and exporters interact with government clearance systems.25

23.The Government published a position paper on future customs arrangements with the EU in August which proposed two possible models for post-Brexit arrangements. These were described as:

24.In October, the Treasury published a White Paper and a draft Customs Bill, which provides some more detail on the Government’s view on possible future arrangements.27 The Government says that it will “look at options to reduce the pressure and risk of delays at ports and airports”, including by:

These proposals are broadly modifications or expansion of existing systems. We assess their merits and limitations in Chapter 4.

A transition or implementation period

25.James Hookham of the FTA told our predecessors that “customs and other organisations need to invest sufficiently to preserve as closely as possible the levels of service and reliability through our ports that we have at the moment”. He warned that in moving to new customs arrangements, “we are starting from a blank piece of paper”. He believed it would be “a nightmare scenario” if the negotiation process resulted in traders being given very little time to deal with customs changes and were “confronted with a matter of days” before new systems were implemented.28

26.Andrew Baxter of Europa Worldwide Logistics argued that “if you had to make those infrastructure things happen in two years, you would have your work cut out. To make them happen in a year—that is not enough time”. He believed that it was possible to achieve the necessary change but that that would require “fast reaction from the Government to make sure we are properly prepared for Brexit”.29 He was very clear that “you can’t have Britain leave the customs union unless customs are ready to deal with the things they need to deal with”. The implications of not achieving this and having queues at borders was unthinkable; and “it doesn’t have to happen. Government just needs to act in order to prevent that problem”.30

27.More recently, Mark Corby, Chair of the BEIS-sponsored UK Trade Facilitation Expert Panel, has stated that the UK could be ready to operate a new customs system by 2019 but also warned of the prospect of “total chaos” if the necessary preparations are not made in good time. He has argued that to get to a position where the system does not collapse on day one of Brexit, decisions are needed now, but he feared that this was unlikely to happen.31

28.In advance of longer term arrangements being implemented, the Government has suggested there might be an interim time-limited arrangement based on a model of “close association with the EU Customs Union” using a shared external tariff, and without customs processes or duties between the UK and EU member states.32

29.In October, the five leading UK business organisations (British Chambers of Commerce, CBI, EEF, the Federation of Small Businesses and the Institute of Directors) wrote to the Brexit Secretary to warn that the UK risks losing jobs and investment without an urgent Brexit transition deal.33 The CBI had previously welcomed the Government’s proposals for a smooth transition but warned that “to secure frictionless trade, negotiations on regulation, tariff and non-tariff barriers will have to take place.  All efforts should be made to deliver a single-step transition, so that businesses don’t have to adapt twice.”34

30.From the Home Secretary’s evidence to us last month, it appears that much of the Home Office’s planning is predicated on there being a transition or implementation period.35 Were there to be no deal, and therefore no transition, as the Prime Minister and Cabinet Ministers have suggested as a possibility, some of the consequences for customs arrangements would be out of the UK’s control. Planning by the Home Office is required for goods entering the UK from the European Union and departing from the UK to the European Union.

31.Given that there are only 16 months to go until a transition arrangement or implementation period would need to start, there is a worrying lack of clarity about whether the Government intends to preserve existing policy and operational practices during the transition, or whether there will be substantive differences in customs arrangements. It is also unclear when the Government intends to clarify this. This is a concern, given that there are significant lead times and costs involved; for example, in recruiting and training new Border Force officials (as explored in Chapter 4). The Brexit Secretary has stated that he wants agreement with the European Union on transitional arrangements “in the first quarter of next year”.36 The Prime Minister, by contrast, has suggested that any transitional arrangements cannot be formally agreed until the UK’s future trading relationship with the European Union has been agreed.37 It has been reported that EU officials now envisage a transition period of 21 months; and the EU’s lead negotiator Michel Barnier was quoted as saying “it makes sense that [the transition] covers the financial period, so until 2020”.38

32.Mark Corby, chair of the UK Trade Facilitation Expert Panel, has stated that “You need three to five years, taking the transition up to 2025, to put in place the untried, streamlined systems ultimately envisaged.”39 Similarly, Anastassia Beliakova, head of trade policy at the British Chambers of Commerce, said that “A transition period should be at least three years. This is important not just for businesses to prepare, but also for new IT systems to be put in place, for [HMRC] to hire and train new staff, for new infrastructure to be built.”40 Jonathan Roberts, the UK Chamber of Shipping’s Director of Communications, has emphasised that companies are keen to begin working to adapt to the post-Brexit scenario, which he envisages will include significant development of port infrastructure, but they need to know what transitional arrangements they will be required to move towards before action can begin.41

33.The outcome of the Brexit negotiations which would cause the least upheaval for ports, points of entry, and traders doing business with EU Member States would be the preservation of the operational status quo for customs arrangements and remaining in the customs union. The Government should aim to agree transitional arrangements with the EU which involve no practical change to customs operations either in the UK or the EU, and especially at the Irish border, including the maritime border with Wales.

34.If it is not possible for the Government to reach a deal with the EU that results in no changes to customs and border operations in the transition period, then businesses and haulage operators urgently need details of what those changes will be. At a minimum, the options under consideration should be published so that these organisations and the public sector can make the necessary plans and investments for those operational changes.

35.Given the lead times for changes in staffing, technology and infrastructure, Border Force, HMRC and other public sector agencies also need clarity rapidly if any such changes will be required for the transition. The Government must make sure that all affected agencies have contingency plans in place to introduce new systems and capacity over the next 16 months. The Home Office should also set out its own urgent assessment of the additional costs of the options for each scenario.

36.The Brexit Secretary has stated that he wants to reach agreement on transitional arrangements in the first quarter of 2018. This timescale already poses immense difficulties if significant changes are required. If there is any further slippage to this timetable it will be extremely damaging to the smooth operation of the border regime, including to trade and security operations, and to businesses which will struggle to make major changes in such a short period of time.

The implications for customs of no deal on Brexit being agreed

37.The IfG report argues that failing to reach agreement with the EU would mean that UK customs would experience “the greatest amount of change in the least amount of time, with a huge increase in demand on capacity and capability at the border. New systems, staff and infrastructure would need to be in place for 29 March 2019”.42

38.When the Brexit Secretary updated the House on the October round of negotiations, he made clear that, although the Government was “straining every sinew to get a deal” and that that was regarded as “the best outcome”, it was necessary to prepare for the eventuality of no deal being achieved, for two reasons: “The first is that it is a negotiation with many people and it could go wrong, so we have to be ready for that. The second is that in a negotiation you always have to have the right to walk away: if you do not, you get a terrible deal”.43 The Home Secretary was giving evidence to us on Brexit delivery at the same time as Mr Davis was making his Statement. She told us that “our planning assumption is that we get ready for having a deal”, although planning would also take place for a no deal scenario.44

39.The White Paper on the draft Customs Bill set out the contingencies being considered in the event of there being “no deal”: the Customs Bill will make provision for the UK to establish a stand-alone customs regime from Brexit day, which will include setting tariffs and quotas, and establishing a goods classification system in line with the UK’s WTO obligations. The UK would apply the same customs duty to every country with which it does not have a trade deal or otherwise provide preferential access to the UK market. The level of this duty would be decided by the Government, and set out in secondary legislation before the UK leaves the EU. The Government has not yet set out a timetable for when those duties and processes would be set.

40.In the event of no deal, businesses which currently trade only with the EU will become subject to customs declarations and checks for the first time and imported goods would become liable to customs duty and import VAT. Certain goods may require import or export licences, and traders exporting to the EU would have to submit an export declaration. The Government says that it is “actively considering ways in which to mitigate the impacts on traders [ … ], and the Customs Bill will make provisions that would allow the government to implement such facilitations”. This will include traders needing to be registered, which would then provide them with an Economic Operators’ Registration and Identification System (EORI) number.45

41.If no deal is reached on customs arrangements, it will result in all those involved in customs in the UK experiencing a huge amount of change in a very short time, with a vast increase required in capacity and processes at the border, with the risk of either significant delays at ports of entry, or of inadequate checks taking place. A major contingency plan is therefore needed for the border which sets out the volume and nature of checks that the Government would expect to operate in the event of no deal. It should include plans for extra staff, additional infrastructure and new processes for businesses, and set out the costs of these plans. The long lead times that these changes require mean that, even if negotiations on a transitional arrangement continue throughout next year, the country cannot afford “no deal” arrangements to be left until the last minute. Therefore, Ministers need to set out early in the New Year the timetable they will follow for decisions, including when extra staff will start to be recruited and trained on a contingency basis, and what the costs and funding arrangements will be. The Government will also need to provide detail to businesses on the checks they can expect on goods at the border in the event of no deal, so that they can put in place their own contingency arrangements.

42.We set out more details of the issues that need to be addressed in the next Chapter.

22 Speech by the Prime Minister: The government’s negotiating objectives for exiting the EU, 17 January 2017; and HM Government Future customs arrangements: a future partnership paper, August 2017, Executive Summary

23 The Guardian, 15 August 2017, ‘A fantasy’: EU leaders dismiss UK’s post-Brexit customs plan

24 Institute for Government, Implementing Brexit: customs, pp 17–18. See also IfG, Frictionless trade; what Brexit means for cross-border trade in goods, August 2017

25 NAO, The UK border, p 29

26 HM Government Future customs arrangements: a future partnership paper, 15 August 2017, paras 27 and 38–42

28 Oral evidence taken on 25 January 2017, HC 494, Qs 137, 147, 186

29 Oral evidence taken on 25 January 2017, HC 494, Qs 137, 144, 147

30 Oral evidence taken on 25 January 2017, Q184

31 BBC Radio 4, Today, 20 October 2017

32 HM Government Future customs arrangements: a future partnership paper, 15 August 2017, para 6

33 BBC News, 23 October 2017, Brexit: Business lobby groups call for transition deal clarity

34 CBI Response to the Customs Union Partnership Papers, 15 August 2017

35 Oral evidence taken on 17 October 2017, HC 434

36 Select Committee on Exiting the EU, oral evidence taken on The Progress of the UK’s negotiations on EU withdrawal, 25 October 2017, HC 372, Qs 41–42

37 HC Deb, 23 October 2017, col 30

38 The Guardian, 26 October 2017, Brexit transition period likely to be limited to 21 months, EU officials say

39 Financial Times, 18 October 2017, The case for a longer Brexit transition

40 Financial Times, 18 October 2017, The case for a longer Brexit transition

41 BBC News, 29 September 2017, blog posts

42 Institute for Government, Implementing Brexit: customs, p 20

43 HC Deb, 27 October 2017, col 736

44 Oral evidence taken on 17 October 2017, HC 434, Q15

45 HM Treasury, White Paper on the Customs Bill: legislating for the UK’s future customs, VAT and excise regimes, October 2017, paras 5.10, 5.27–5.29

13 November 2017