192.The imposition of both tariff and non-tariff barriers on trade between the UK and the EU would be likely to lead to an increase in costs to businesses, as a result of increased administration. Such costs would be additional to any tariff levied: they would result from administering tariffs, rules of origin and customs procedures, which could affect the competitiveness of UK industry.
193.These costs would be incurred for UK trade with the EU once the UK left the customs union, regardless of the new trading framework (unless a unique customs arrangement were to be agreed between the UK and the EU, an option that is discussed below). In the absence of such an arrangement, the nature and amount of the costs would depend on whether trade was conducted under WTO rules or under a FTA.
194.Box 7 outlines existing procedures and requirements related to customs controls.
This box considers how the UK currently applies EU rules on customs controls and procedures.
Administrative requirements for intra-EU trade
EU businesses that trade within the EU do not usually need to obtain compliance certificates and are not subject to rules of origin.
Imports from EU countries are not regarded as imports for customs purposes as they are ‘goods in free circulation’ within the customs union. Therefore no customs duty or import VAT is charged on these goods and there is no requirement for a formal customs declaration. There may still be some national restrictions in place, which may require risk-based and highly targeted border checks, for instance on firearms. These are not routine controls. If a firm’s trade with the EU-27 exceeds £1.5 million imports, it must also provide additional information on a monthly Intrastat declaration.
For exports to the EU-27, UK businesses are required to declare the total of their sales or acquisitions of goods from other EU Member States on their VAT return. If a firm’s trade with the EU exceeds £250,000 for goods exports, additional information must be provided on a monthly Intrastat declaration.
UK legislation requires that businesses retain any information used to compile their Intrastat declarations for 6 years.
Animal products can be traded within the EU and in non-EU EEA states accompanied by a commercial document only and do not need to pass through a Border Inspection Post.
Administrative requirements for trade with non-EU countries
EU businesses which trade with non-EU countries need to obtain an Economic Operator Registration and Identification (EORI) number. This enables the Economic Operator (EO) to uniquely identify itself in whatever customs activity it undertakes or plans to be involved in. The requirement is the same for importing and exporting businesses. In order to benefit from arrangements under mutual recognition agreements with third countries, businesses need to apply for Authorised Economic Operator status for security and safety (AEOS).
HM Revenue and Customs (HMRC) runs an electronic declaration system, which handles customs declarations for exports to and imports from non-EU countries. This declaration system, also known as CHIEF (Customs Handling of Import and Export Freight), records all imports and exports into and out of the UK. The format of customs declarations is standardised across the EU and is also used by members of the EFTA and countries wishing to join the EU. Economic operators can be authorised to lodge a simplified declaration, with a reduced data set.
Customs declarations serve the purpose of controlling the movement of goods, ensuring compliance with customs regimes and protecting revenue, supporting the zero-rating of exports for VAT purposes, supplying data for risk assessment to assist with international requirements, and supplying data for trade statistics. UK exporters can use freight forwarders to make the export declaration on their behalf, which entails additional costs to their business. UK businesses are required to keep customs paperwork for four years.
UK exporters are required to obtain a license to export some goods to non-EU countries. Documentary checks may be required and the exporter will need to provide evidence to support its export declaration before the goods can leave the EU. This is the case, for instance, with art works and cultural goods that require a cultural licence, or certain hazardous chemicals, as specified in the Prior Informed Consent Regulation (PIC, Regulation (EU) 649/2012).
Imports from non-EU countries, as exports to non-EU countries, require an EORI number and an import declaration, to be made in CHIEF. Such an import declaration needs to enable customs authorities to identify the customs status of goods at any time (currently ‘Union’ or ‘non-Union’ goods), in order to determine whether the goods are subject to customs controls and/or customs charges (for example, customs duty, import VAT, anti-dumping or countervailing duties.
All products of animal origin imported from a third country into the EU are subjected to a documentary check—an assessment of the common veterinary entry document, public and/or animal health certificates, and accompanying commercial documentation. Rules of origin also apply to third country agricultural imports.
195.The first issue raised by witnesses related to tariffs was the additional bureaucracy for companies. Dr Virginia Acha, Executive Director of Research, Medical and Innovation, Association of the British Pharmaceutical Industry, said there was “no doubt that the administrative burden and the cost is a challenge for the [pharmaceutical] industry”. The Association of Manufacturers of Domestic Appliances (AMDEA) wrote that the “administrative burden” of tariffs in the capital goods sector “should not be underestimated”. Mr Fergus McReynolds, Director of EU Affairs, EEF—The Manufacturers’ Organisation (EEF) agreed, and said the challenge was “not just the tariff … we have to fully understand the implications of the customs controls that would potentially be introduced, and understand the time and any barrier that might introduce”.
196.From the automotive sector, the National Franchised Dealers Association was concerned that tariffs and customs procedures would result in “administrative and financial burdens on the import and export of vehicles”. From the perspective of the supply chain of the aerospace and defence sector, Meggitt PLC estimated that the administration of “tariff barriers would pose a significant amount of red tape costs (+200%)”. This “would be counterproductive”.
197.HMRC highlighted that the administrative burden of export declarations was “affected by a number of factors, such as business size; type and volume of goods; country of origin/destination; and the timing and mode of transport selected”. Nevertheless, the advisory firm Global Counsel told us, “None of the established mechanisms of trading with, or integrating with the EU market short of full membership, eliminate these requirements entirely.”
198.The second issue brought up by witnesses was the likelihood that customs administration would lead to delays. Mr Chris Hunt, Director General and Company Secretary, UK Petroleum Industry Association, wrote that the downstream oil sector needed spares for refineries “to be delivered quickly to the UK when they are required, often at very short notice”. There was a risk that a “lengthy customs import process could lead to refinery production issues should products not be delivered promptly”.
199.Mr Mike Hawes, Chief Executive Officer, The Society of Motor Manufacturers and Traders, told us one should “by no means be relaxed” about the impact of customs controls on trade. When products had to pass borders, “You need a customs validation, that creates some delay, and anything that delays creates cost.” He agreed that products would either need to be stored in warehouses, which would “act as a buffer” for delays, or one would “have to increase the logistic capability”. During the customs checks, “the truck may have to wait there for however long it is going to take before moving on, so you will potentially have to double up the transport costs, too”. Similarly, Mr Paul Everitt, Chief Executive Officer, ADS Group, said that in the aerospace and defence sector, “The UK’s industry benefits from being able to move components quickly and efficiently across Europe … Any customs or border controls could add significant administrative and processing costs, including the need to increase stock holding to avoid any potential delays.”
200.Meggitt PLC wrote that the administration of instructions to forwarders and declaration checks (both customs entry processes) would increase by “a further (approx.) 22,000 entries”. It added that the “average time for an instruction issue is 10 minutes and [for] an entry check 5 minutes”. A study by Oxera in June 2016 found that around 8% of the cost of importing goods by sea arose from customs clearance. For a single freight container, customs clearance processes added around one day to the import process.
201.Dr Acha noted that delays to the shipment of pharmaceuticals could also have a direct impact on patients in the UK. She was “very concerned” about introducing “delays into the process that may mean that medicines coming to a British patient are delayed in any way”.
202.Lord Bridges of Headley MBE, Parliamentary Under-Secretary of State, Department for Exiting the EU, acknowledged that for time-critical industries, avoiding processing delays “on both sides of the Channel” was “undoubtedly an issue”. He said that, “having identified a problem we are now trying to simplify the solution to it as far as possible … we are really focused on it”. He highlighted that “roll-on, roll-off traffic” across the channel might be problematic, but “containerised traffic” was already “highly digitised”. This “may be able to help us as we move forward on this”.
203.A third issue is the administration of trade with the EU as a non-Member State, which would increase the work of HMRC. HMRC told the Committee that it was “currently assessing the potential impacts of leaving the European Union, including the number of declarations that may arise and the impact on resourcing”. Dr Acha estimated that as a consequence of the imposition of customs duties, “the need to go through declarations will jump to about 350 million declarations per annum. At the moment they are only geared up for about 100 million.” AMDEA agreed that administration was a concern.
204.The UK Trade Policy Observatory, University of Sussex, also believed that introducing customs procedures between the UK and the EU would result in additional costs falling on the UK state. Collecting tariffs would “require customs posts and inspections, where currently there are none”. Mr Steve Elliott, Chief Executive Officer, Chemical Industries Association, said that leaving the customs union would mean the UK having to “rewrite … the customs code, and recruit and retrain customs officers”. The Government would need to “look at the extent to which customs controls would need to be reintroduced”, which would potentially result in additional administrative requirements. The UK Government would have to decide whether to create “a single administrative document with 54 questions and 8 sections: goods, movement of goods, commodity codes, customs procedures, rules of origin, duty administration, et cetera”.
205.Mr Peter Hardwick, Head of Exports, The Agriculture and Horticulture Development Board (AHDB), expressed particular concern about the UK system for agricultural declarations. New Zealand’s electronic certification system, he said, enabled it to pre-clear goods and thus speed up the process. In contrast, the UK’s system was “based on Crown watermarked paper”, with changes being “handwritten” and sent around by “snail mail”. He continued: “If there is an opportunity with Brexit, it will be to really address and modernise some of our processes so that we can minimise the impact on industry.” HMRC responded that while agricultural goods with licenses issued in other Member States required paper versions of these licenses in order to be cleared in the UK, “most CAP licences are already issued electronically”, and “the vast majority of customs declarations in the UK” were dealt with via CHIEF.
206.Global Counsel wrote that any trade relationship with the EU post-Brexit would signify a “huge step change in the volume of goods moving through the UK’s formal systems of trade processing”. Such a change would raise a “simple capacity question with respect to the system’s ability to essentially double its basic coverage”. For a number of UK ports this might also have “infrastructure implications if new requirements physically slow the transit of goods through them”. Illustrating this point, Oxera wrote that, were the UK to leave the customs union, “a lorry would have to wait while each separate pallet is checked, requiring extensive investment in parking facilities at UK ports and/or extensive queues in France (if customs clearance were moved there) or UK port towns”.
207.Global Counsel acknowledged, though, that there was a possibility to agree “simplified procedures for EU-UK trade as part of an FTA”. For example, “trusted trader status and self-assessment systems can be used to simplify procedures for recognised bulk or regular traders”. Such trade facilitation “should be seen as a clear area of mutual interest in practical solutions” between the UK and the EU, “and should be actively carved out from politicisation or wider trade-offs”.
208.In addition to the costs discussed in Chapter 5 in relation to rules of origin, administration costs can also arise in the absence of a common regulatory system. This is because goods have to be checked at the border, imposing additional costs not only on businesses, but also on the state. The Government’s decision that the UK should neither become a non-EU EEA country nor enter into a customs union with the EU means that the same administrative checks would apply to UK imports from and exports to the EU as currently apply to trade with non-EU countries. This is likely to be the case whether UK trade with the EU is conducted under a FTA or under WTO rules, as discussed in Chapter 4. Any additional costs will be incurred over and above tariff-related costs (as discussed above).
209.The regulatory issues raised by witnesses to this inquiry related primarily to the pharmaceutical and food and beverages sectors. First, there was the potential for disruption to UK trade with third countries if the UK were to diverge from the EU’s regulatory framework. While a number of third countries have agreed with the EU the mutual recognition of their regulatory frameworks, such agreements would not apply to the UK post-Brexit. Thus Deloitte LLP wrote that introducing a new set of pharmaceutical standards specific to the UK would “potentially impact trade [with] countries outside of the EU where the UK would also need to seek mutual recognition”. Mr Hardwick told us that in order to trade in agricultural goods with China, “We went through an extremely long process to get approval … and the certification for that and 360 other export health certificates in the livestock sector alone make specific reference to the EU regulatory framework.” After Brexit, the UK would have to establish its own regulatory framework, and China might want to “carry out an audit of the regulatory system itself”. The task of explaining the UK regulatory framework to trading partners would be “complicated” and “take resource and people”.
210.There would also be extra administrative costs in trading with the EU itself. We heard from HMRC that “all products of animal origin imported from a third country are subjected to a documentary check”. This included “an assessment of the common veterinary entry document, public and/or animal health certificates and accompanying commercial documentation, which may include bill of lading, invoice and packing list”. In contrast, imports or exports of animal products within the Single Market can simply be accompanied by a commercial document, with details of the contents of the consignment, sender and recipient.
211.Mr Hardwick said that the “transactional costs alone would be significant” for such checks between the UK and the EU. AHDB estimated them to be “in the region of 8% to 10%, and perhaps a bit more than that.” The FDF estimated this cost at “a further eight per cent”, and added that the increase in transactional costs for “composite products” was “likely to be higher”.
212.Mr Hardwick gave the example of trade between Norway and Sweden. Even though Norway is part of the EEA, “it still takes hours for certain types of goods to cross the border”, thanks to customs controls. This was in particular the case with meat, due to a highly regulated meat industry in Norway.
213.The Prime Minister, in her speech on 17 January 2017, said:
“I want Britain to be able to negotiate its own trade agreements. But I also want tariff-free trade with Europe and cross-border trade there to be as frictionless as possible. That means I do not want Britain to be part of the Common Commercial Policy and I do not want us to be bound by the Common External Tariff. These are the elements of the Customs Union that prevent us from striking our own comprehensive trade agreements with other countries. But I do want us to have a customs agreement with the EU.”
214.On the content of such an agreement, the Prime Minister said that she had “an open mind” over whether it would entail “a completely new customs agreement”, becoming an “associate member of the customs union in some way”, or remaining “signatory to some elements of it”.
215.Dr Peter Holmes, Reader in Economics, University of Sussex, said: “There is currently no deal which exactly matches the aims which Mrs May appears to be seeking to achieve.” The EU-Korea FTA had provisions which meant that “both parties accept cars and electronic goods certified to the other parties’ norms without further inspection”, and the EU-Switzerland agreements included “mutual recognition of testing and certification for conformity assessment, but there have to be border checks of documents for proof, even when there is exemption from tariffs or testing of goods themselves”. He said that “no agreement, even the EEA, allows goods to move across EU borders with no checks at all”.
216.An alternative to a customs union, according to Dr Holmes, could be a FTA “under which there are zero tariffs on goods originating in partner countries but no Common External Tariff”. Such a FTA would entail customs checks at borders within the FTA to avoid goods entering the UK at a lower tariff than the EU’s Common External Tariff and then freely circulating within the EU. Therefore, the border check would “establish what tariffs are payable (which might be zero in the case of an FTA)”; conformity of UK goods with EU rules would also need to be inspected, “at minimum to insure they have paperwork which does confirm compliance”.
217.Lord Price CVO, Minister of State for Trade Policy, Department for International Trade (DIT), told us that DIT was already involved in discussions on customs procedures: “Part of the role of DIT … was to talk to other countries about customs facilitation.” Lord Bridges said the “most important thing” was maintaining “free and frictionless trade”. In this regard, “we need to look at the entire supply chain from start to finish, as well as at its different component parts. If we focus simply on what happens at the border, although that is critical, we may miss other points.”
218.In particular, Lord Bridges said that a customs arrangement with the Republic of Ireland after Brexit was “obviously a significant challenge”. The Government did “not want to return to the hard borders of the past”:
“[The Government is] looking closely at how digital technology data can help us and how working closely—I am choosing my words very carefully here—with our colleagues and counterparts in the Republic and in Northern Ireland can help address the flow of goods and make sure that it is as free and frictionless as possible … We are acutely aware that there, among all places, we need to make sure that the flow of goods remains frictionless.”
219.Lord Bridges gave some options that the Government was studying with regard to customs, but with the caveat that these were “examples that we might look at and which you may wish to look at”; they did not mean that “A, B or C is now going to be a Government position in the negotiations”.
220.One example of simplified customs procedures was NAFTA, which was a useful precedent for how “very complex supply chains, especially with the automotive industry” are managed within a FTA. This is done by applying diagonal cumulation of rules of origin between NAFTA countries (see Box 6); a Customs Sub-Group has also been created to harmonise customs procedures.
221.Another example was the Authorised Economic Operator (AEO) scheme. This provided businesses with “simpler and faster customs procedures”. AEO status indicated “that a trader’s role in the international supply chain is secure and that their customs controls and procedures are efficient and compliant”. According to HMRC estimates, “UK companies with AEO status account for around 60% of the UK’s imports and 74% of the UK’s exports.” Lord Bridges added that mutual recognition agreements on customs, which the EU had with China, Japan, Norway, Switzerland, and the US, allowed “firms with AEOs in one party to take advantage of quicker access to certain simplified procedures, and sometimes they give the ability to fast-track shipments while exporting to the other party”. We note that the UK is currently part of the EU’s AEO concept, which has its basis in the Union Customs Code. After Brexit, the UK would need either to adopt the provisions of the AEO scheme into UK law, or develop its own AEO scheme. It is unclear whether recognition of the UK’s AEO scheme by other countries after Brexit would be automatic, or would require prior agreement or negotiations.
222.Finally, he gave the example of “the Common Transit Convention, which the EU and other parties are party to”. Under this scheme, “The trader responsible for the movemgent provides a guarantee to cover the potential duty and tax liability that will fall due in the destination country, assuming that the goods are not diverted en route”. This “facilitates the smooth movement of goods across countries and ensures that, if things go wrong in a legitimate supply chain, there is no fiscal loss to the authority”. The Common Transit Convention applies to EU Member States, members of EFTA, Macedonia and Serbia. Any third country may become a contracting party following unanimous agreement by current signatories to the Convention.
223.Dr Holmes agreed that a UK-EU FTA could simplify some procedures: it could reduce the burdens of “paperwork needed to prove compliance with rules of origin … [and] ease the origin requirements” (we discuss rules of origin in Chapter 5). It could also reduce the “documentation needed to prove conformity with origin and technical requirements”. He noted:
“The kind of agreement that might be envisaged could not stop the creation of additional trade barriers but it would be seeking to minimize the extent of additional obstacles. There is, however, an inescapable trade-off between closer access to the EU market and freedom to set one’s own national rules and regulations and external trade policy.”
224.In general, any UK-EU agreement would have to comply with WTO rules. Dr Holmes said: “This means that it would have to cover ‘substantially all trade’, and be officially notified to the WTO. We could not sign a customs union covering only cars, or informally agree not to apply tariffs on EU goods while applying them to others, without risk of challenge.” Nevertheless, there was some leeway in the application of rules of origin.
225.Overall, Dr Holmes assessed it to be “unlikely that such a [UK-EU] deal could be in place within 2 years, although a framework could be agreed leading to an ‘implementation’ phase over the next years (in reality this period would involve finalising negotiations)”.
226.Leaving the EU customs union would result in costly administrative requirements and customs procedures, whatever new framework for trade is established. This would result in a significant additional administrative burden for companies, and delays to consignments of goods, incurring additional costs.
227.Administering UK-EU tariffs and non-tariff barriers—in the absence of a common regulatory system—would also significantly increase the work of HMRC, a task for which it is not currently resourced. The UK would also have to establish new customs posts, develop a new customs code and consider improvements to the UK’s systems for trade processing. We call on the Government to set out its plans for reviewing and if necessary increasing the resources available to HMRC and other agencies.
228.We welcome the Government’s commitment to seeking simplified customs procedures for EU-UK goods trade. We note that the customs agreement proposed by the Prime Minister would be unprecedented, and we are unclear whether it will be possible outside a formal customs union (including the Common External Tariff).
230.The Authorised Economic Operator scheme provides an opportunity for registered companies to streamline certain customs procedures, and we recommend that the UK Government adopt the provisions of the current AEO scheme into UK law after Brexit. The scheme would not, however, remove the requirement for customs checks to be implemented between the UK and the EU after Brexit, and would not prevent the additional burden of associated administration and costs from arising.
350 Rules of origin determine where a product and its components were produced, in order to ensure that the correct customs duty is levied.
351 Intrastat is the system for collecting information and producing statistics on the trade in goods between EU Member States.
352 HMRC, Authorised Economic Operator (21 September 2012): [accessed 14 February 2017]
354 Written evidence from AMDEA ()
355 (Fergus McReynolds)
356 Written evidence from the National Franchised Dealers Association ()
357 Written evidence from Meggitt PLC ()
358 Written evidence from HMRC ()
359 Written evidence from Global Counsel ()
360 Written evidence from Chris Hunt ()
362 Written evidence from Paul Everitt ()
363 Written evidence from Meggitt PLC ()
364 Oxera, Agenda—Brexit: implications for the transport sector (June 2016): [accessed 10 February 2017]
367 Written evidence from HMRC ()
369 Written evidence from AMDEA ()
370 Written evidence submitted to the EU Internal Market Sub-Committee, 30 November 2016 (Session 2016–17) (UK Trade Policy Observatory, University of Sussex)
372 (Peter Hardwick)
373 CAP licenses are licenses for products covered by the EU’s Common Agricultural Policy (CAP).
374 Written evidence from HMRC ()
375 Written evidence from Global Counsel ()
376 Oxera, Agenda—Brexit: implications for the transport sector (June 2016): [accessed 10 February 2017]
377 Global Counsel detailed a number of possible options, including: “fully recognise each other’s trusted trader designations and link them to simplified processes on both sides; allow for simultaneous export and import clearance based on a shared data template, or a single customs border; implement publicly-funded single window systems that would act as digital interfaces between traders and border authorities at no cost for economic operators (as opposed to the fees currently payed to private digital intermediaries in the UK)”. Written evidence from Global Counsel ()
378 Written evidence from Global Counsel ()
379 Written evidence from Deloitte LLP ()
380 (Peter Hardwick)
382 Written evidence from HMRC ()
384 Written evidence from HMRC () We note that “certain fish and agricultural products” are not part of the EEA Agreement. EFTA, Free Movement of Goods (August 2014):
385 (Peter Hardwick)
386 Written evidence from FDF ()
387 (Peter Hardwick)
388 Theresa May MP, Speech on the government’s negotiating objectives for exiting the EU, 17 January 2017: [accessed 10 February 2017] We note that the EU’s customs union with non-Member State Turkey involves a common tariff.
389 Theresa May MP, Speech on the government’s negotiating objectives for exiting the EU, 17 January 2017: [accessed 23 January 2017]
390 Written evidence from Peter Holmes ()
392 (Lord Price)
393 (Lord Bridges of Headley)
396 NAFTA is a trade agreement between Canada, Mexico, and the US. It entered into force in January 1994.
397 This Sub-Group was set up under the NAFTA Working Group on Rules of Origin, to which it reports. World Customs Organisation, ‘Working Group and Customs Sub-Group in the NAFTA Model’ (4 July 2012): [accessed 17 February 2017]
398 (Lord Bridges of Headley)
400 European Commission, ‘Authorised Economic Operator (AEO)’ [accessed 21 February 2017]; The EU established its AEO concept based on internationally recognised standards, creating a legal basis for it in 2008 through the ‘security amendments’ to the Community Customs Code () and its implementing provisions.
401 BDO, ‘Article: Brexit: What does ‘taking control’ mean from a customs duty perspective?’: [accessed 21 February 2017]
402 (Lord Bridges of Headley)
403 HMRC, ‘Guidance—UK Trade Tariff: community and common transit outwards’: [accessed 16 February 2017]
404 Recommendation No 1/93 the EEC-EFTA Joint Committee on Common transit of 23 September 1993 for the amendment of the Convention of 20 May 1987 on a common transit procedure, (14 February 1996) and Council Decision of 22 November 1993, (14 February 1996)
405 Written evidence from Peter Holmes ()
406 Written evidence from Peter Holmes (); The WTO rules on the coverage of FTAs are set out in Article XXIV:8, General Agreement on Tariffs and Trade 1994: [accessed 13 February 2017] and Article V:1(a), General Agreement on Trade in Services: [accessed 13 February 2017]; Our previous report considered these issues. European Union Committee, (5th Report, Session 2016–17, HL Paper 72)
407 Written evidence from Peter Holmes ()