Brexit and the future of Customs Contents

1Implementing the new Customs Declaration Service

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Revenue & Customs (HMRC).1

2.In 2013–14, HMRC started planning to replace its customs system, Customs Handling of Import and Export Freight (CHIEF), following changes to European Union (EU) legislation which would have been costly and difficult to make on CHIEF’s ageing technology. CHIEF currently processes around 55 million import and export customs declarations each year, collecting around £34 billion in tax and duty on imports from countries outside the EU.2 The continued smooth operation of trade is critical to the UK economy—in 2016, nearly £740 billion of goods crossed the border.3

3.HMRC is replacing CHIEF with a new Customs Declaration Service (CDS). Planning for the new system started before the EU referendum in June 2016. Traders only have to make a declaration if they are importing from or exporting to countries outside the EU. The demands placed on CDS will therefore be significantly higher following the decision to leave the EU and the government’s commitment to leave the single market and seek a new customs arrangement from March 2019. HMRC estimates that the number of customs declarations could increase to about 255 million each year. The new system may also need to accommodate changes resulting from the outcome of the UK and EU negotiations, which are currently not in scope of the CDS programme. HMRC plans that CDS will be ready to handle all customs declarations from January 2019, only two months before the UK plans to leave the EU in March 2019.4

4.There are 141,000 traders that currently make declarations in CHIEF. HMRC estimates that this could rise to 273,000 after the UK leaves the EU.5 The Port of Dover told us it currently processes up to 10,000 freight vehicles every day (except Christmas Day), the equivalent of a 180 kilometre queue.6 Any system issues which lead to delays in processing this traffic could result in queues building up, and trucks filled with rotting food. HMRC agreed that the impact of CDS going wrong, without an adequate back-up plan, would be catastrophic and would impact on the UK’s global reputation.7

5.There are a number of potential outcomes of the UK’s current negotiations with the EU, including: a negotiated agreement to remain compliant with EU rules, including as part of a transitional period; no negotiated agreement and no transitional arrangements in place; a bespoke negotiated agreement that differs minimally from the current EU rules; and a bespoke negotiated agreement that differs significantly from the current EU rules.8 HMRC told us that the fourth of these options “is not the UK Government’s position” and that it has got to consider whether it can “deliver something for the UK to do options one, two and three”.9

6.HMRC told us that it is making good progress with CDS, is meeting all the programme milestones and is “reasonably confident” of delivering the new system on time in January 2019. It is satisfied that the programme is “well-managed and well-governed”. However, HMRC also told us that “there are no guarantees on technology projects”.10 The project is ‘amber’ rated by the Infrastucture and Projects Authority, based on its review of the programme conducted in May 2017.11

7.HMRC listed four significant risks to the CDS programme, any of which could either delay the project or, in the worst-case scenario, result in CDS not being ready in time. These four risks are: the integration of the eight components making up CDS; testing that CDS can accommodate more than 250 million declarations and perform appropriately at this level; the migration of users and data from CHIEF to CDS; and user readiness.12 HMRC told us “If we do not manage those risks, you are absolutely right that this will either get delayed or go off track”.13 HMRC’s delivery timetable is very tight, and it told us that it would know decisively between April and July 2018 whether it could successfully deliver CDS by March 2019.14 HMRC’s Permanent Secretary told us that, while the timing of another review by the National Audit Office was clearly a matter for the Comptroller and Auditor General, around March or April 2018 would seem to him to be about the right time to look again for assurance on progress with implementing CDS.15

8.HMRC currently estimates that there are around 132,000 traders that may need to make customs declarations for the first time once the UK leaves the EU.16 Its previous estimate, as at July 2018, was 180,000 traders.17 HMRC has engaged with some larger traders and representative groups but only plans to start wider engagement with all traders between Easter and Summer 2018. HMRC told us that various industry organisations had told them not to communicate with all importers and exporters until it was clearer about what was required of them to comply with customs, and when they had to do it.18 Communication with all traders might not start until 2020 if there was a negotiated settlement with a transition period until 2021.19 We have been told that the CDS section of the GOV.UK website lacks detailed and recent information, and that it appears to have been last updated in April 2014.20

9.Of the 141,000 traders that currently use CHIEF only 604 are trusted traders with ‘Authorised Economic Operator’ (AEO) status. This compares to more than 6,000 in Germany.21 AEO status is issued by customs administrations, and certifies that a business has met certain standards in relation to the security of their supply chain, their solvency, and their compliance with customs requirements. Traders with AEO status can clear their goods more quickly at the border.22 HMRC told us that increasing the number of traders with this status would be a good idea but it was not currently promoting this. HMRC told us it would only start promoting AEO status when the future of the UK’s customs system was clear.23

10.HMRC confirmed that it has not yet integrated all of the CDS components but has deployed and fully integrated three of the eight components into a live environment. It expected to complete the deployment and integration of the remaining five components by 10 November 2017.24 End-to-end performance testing is due to begin in January 2018.25 HMRC currently has funding of £157 million to develop CDS. This funding will provide the system with the capacity to handle 150 million customs declarations each year. It does not yet know how much additional funding it will need to increase the capacity to handle the potential 255 million declarations after the UK leaves the EU. HMRC has submitted a request to its suppliers to increase the capacity and does not yet know how much this would cost. It expects to know more about its funding requirements by the time it starts the performance testing in January.26

11.HMRC told us that CDS would be sufficiently flexible to deal with existing and future Free Trade Agreements.27 It also confirmed that CHIEF currently handles tariff-related quotas and CDS would also have this functionality.28 HMRC told us that CDS offered greater flexibility than CHIEF due to the very old technology used by the old system which makes it “not very flexible and agile when it comes to making changes”. At the time of our evidence session, HMRC could not confirm when it would need to know about trade remedies to build them into CDS, nor the timeframe for making changes to CHIEF, as the main contingency option, to implement any new trade remedy income streams.29 HMRC subsequently told us that “A full tariff change in CHIEF takes about 7 hours. Individual and point changes to the tariff take less than 2 minutes”.30

12.HMRC told us that using its existing CHIEF system is its main contingency option.31 It is developing CHIEF as a contingency option in parallel with its implementation of CDS.32 CHIEF is designed to handle a maximum annual volume of 100 million transactions and would need to be upgraded to accommodate the potential 255 million declarations that could be made every year.33 One of the reasons for implementing CDS was to ensure the UK’s system was compliant with the EU’s new Union Customs Code (UCC). HMRC told us that the two customs arrangements set out in the Government’s future partnership paper both require the UK to remain compliant with the UCC, whatever the outcome of the negotiations with the EU. However, HMRC also confirmed that upgrading CHIEF will not make it compatible with the UCC.34

13.HMRC has identified seven phases of work in order to try to increase the capacity of CHIEF and has secured £630,000 to start the first three of these.35 It will know more about how long this work will take once its test environment is set up in January 2018.36 HMRC needs a further £7.3 million to complete the additional phases to upgrade CHIEF, giving a total cost of £7.9 million.37 HMRC is “in conversation with the Treasury about needing that additional money if they want an all-up, fully operating CHIEF in case CDS does not work”.38 HMRC told us that “the way in which the Treasury has decided to fund Brexit is to do it in tranches of six months”.39

14.HMRC is in the middle of a major transformation programme and has 15 major 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.40 HMRC’s Director General Transformation is the CDS programme’s senior responsible owner and chair of the CDS programme board.41

15.HMRC told us that CDS is one of seven balanced priorities along with its other programmes that are in the Government’s major projects portfolio.42 In addition to its transformation programmes, HMRC also needs to manage its ongoing business, respond to the UK’s exit from the EU, and implement policy and procedure changes arising from national budgets or other fiscal events. The Permanent Secretary commented that “I do not believe that it is possible to take 250 existing programmes of change and simply add Brexit on. I think you reach the point of organisational capacity and capability and you simply can’t say ‘I can do 250; now I can do 320; now I can do 350’ I just do not think that is credible”. HMRC plans to carry out a full re-prioritisation exercise across its organisation between Christmas and the end of the financial year, and has committed to Ministers to do that.43 HMRC confirmed that “whatever re-prioritisation we do—and we do absolutely need to do that—there is no possible option where the Customs Declaration Service does not become a priority”.44

1 C&AG’s Report, The Customs Declaration Service, Session 2017–19, HC 241, 13 July 2017

2 C&AG’s Report, paras 2, 1.6

3 Office for National Statistics, UK balance of Payments, The Pink Book: 2016, 09 Geographical breakdown of the current account, 9.4: Trade in goods

4 C&AG’s Report, paras 2, 3, 9, 12

5 Q 76

6 Port of Dover (BAC0001), para 2.1

7 Q 48

8 C&AG’s report Figure 4

9 Qq 32, 34

10 Qq 41, 54

11 Q 38; C&AG’s report para 2.9

12 Qq 38, 46

13 Q 38

14 Q 42

15 Q 106

16 Q 119

17 C&AG’s report Figure 2

18 Q 76

19 Q 119

20 Scotch Whisky Association (BAC0005), ‘Potential questions to consider’ 1

21 Qq 107–109

22 HM Treasury, Customs Bill, Legislating for the UK’s Future customs, VAT and excise regimes, CM9502, October 2017, pages 16 and 27

23 Q 113

24 Qq 100–101

25 Q 55

26 Qq 90–92

27 Qq 141–142

28 Qq 66–69

29 Qq 60–65

30 HMRC (BAC0008)

31 Q 71

32 Qq 56–58

33 Qq 25, 27

34 Qq 32, 73; HM Government, Future customs arrangements, a future partnership paper, August 2017

35 Q 31

36 Q 71

37 Q 25, 52

38 Q 31

39 Q 59

40 Q 23

41 C&AG’s Report, para 2.8

42 Qq 22–24, 80–81

43 Q 21

44 Q 22

13 November 2017