Brexit and the future of Customs Contents

Conclusions and recommendations

1.HMRC has not yet done enough to manage the huge uncertainty faced by a large number of traders. HM Revenue & Customs’ (HMRC) latest estimate is that 132,000 traders will have to make customs declarations for the first time once the UK leaves the European Union (EU). HMRC has engaged with some larger traders and representative groups but only plans to start wider engagement with all traders after March 2018. However, this could be much later if there is a negotiated transitional arrangement with the EU. We are not convinced why HMRC could not lay the foundations now for this engagement with all traders to give them as much time as possible to prepare and to allay fears. HMRC could, for example, update regularly the information it provides to traders on its website which we have been told has not been updated significantly since 2014. There are 141,000 traders that currently use the Customs Handling of Import and Export Freight system (CHIEF) but only 604 of these are ‘trusted traders’. This compares to over 6,000 trusted traders in Germany. Trusted traders are a risk-assessed group of traders that are authorised to make customs declarations under simplified arrangements. Both HMRC and trusted traders benefit from this reduction in administration. HMRC is not currently promoting trusted trader status, despite accepting that having more of them would indeed be a good idea. It says it would only start to do so when the future of the UK’s customs system is determined.

Recommendation: HMRC should ensure that traders are informed of the Customs Declaration Service (CDS) timeline and progress by January 2018. As part of its plans to broaden engagement with traders, it should also promote the benefits of obtaining trusted trader status and aim to increase the number of registered traders.

2.It is vital that HMRC has a flexible service which can handle the increased volume of customs declarations and a well-developed contingency option. HMRC has further work to do to increase the capacity of CDS to handle 255 million customs declarations each year, and to develop CHIEF as a contingency option. An upgraded CHIEF needs to respond to changes in wider customs and trade requirements, such as applying additional duties on goods from specific countries. However, HMRC tells us that CHIEF is not very flexible when it comes to making changes. It also tells us that, unlike CHIEF’s older technology, CDS will be flexible to respond to changes such as dealing with any potential new Free Trade Agreements.

Recommendation: HMRC should ensure that the CDS system and the CHIEF contingency option are capable of managing 255 million customs declarations every year, while providing the flexibility to meet the wider challenges of an integrated customs and trade system for the UK, such as managing changes to tariffs, Free Trade Agreements and international trade quotas. HMRC should report back to the Committee by March 2018 to update us.

3.HMRC does not yet have funding to increase the capacity of CDS or to develop contingency options. HMRC does not know how much it would cost to upgrade CDS to deal with the potential increase in declarations, and says it will only know this in January 2018. The existing CHIEF system is its main contingency option, but we are surprised to hear that HMRC and HM Treasury (HMT) are still only ‘in conversation’ over the £7.3 million needed to upgrade CHIEF to be able to deal with the potential 255 million declarations that could be made each year. In the context of the CDS programme, this would seem a relatively small sum to pay to guard against the wider financial and reputational costs of failure.It needs to progress this work urgently and obtain the additional funding required, to ensure that CDS can deal with the potential increase in volumes, and that an adequate fall-back option is in place in case this is delayed.

Recommendation: HMT should ensure that HMRC has sufficient funding by December 2017 to increase the capacity of CDS to handle 255 million customs declarations each year, and to develop functioning contingency arrangements.

4.HMRC is currently managing an unsustainable amount of change which could put the delivery of CDS at risk. HMRC is in the middle of a major transformation programme–it has 15 programmes and more than 250 projects in its transformation portfolio. This includes the ‘Making Tax Digital’ programmes through which HMRC is modernising tax administration for individuals and businesses using digital solutions. HMRC told us that CDS is one of its 7 most important programmes but we are concerned about the Department’s ability to balance its overall risks and ensure it puts emphasis on the right areas. HMRC itself recognises that the scale of its operations, its organisational transformation programme, ongoing policy changes, and preparing for the UK exiting the EU, is an unsustainable amount of change to be dealing with at one time. It intends to undertake a full prioritisation exercise early next year. We agree that HMRC needs to urgently prioritise and make difficult decisions, with the support of HM Treasury. HMRC and wider government need to make CDS one of their top priorities to ensure successful delivery. The UK cannot afford for this to go wrong.

Recommendation: HMRC should report back to the Committee by March 2018 with clear plans on how it will manage the many challenges it faces due to Brexit and its ongoing transformation programmes, including how this will help to mitigate the risks in the CDS programme.

13 November 2017