Chapter 5: The UK Government’s proposed customs arrangement
The Facilitated Customs Arrangement
126.In its White Paper The future relationship between the United Kingdom and the European Union, published on 12 July 2018, and as part of its proposed economic partnership with the EU, the Government proposed a ‘Facilitated Customs Arrangement’ (FCA), to be established between the UK and the EU from the end of the transition period in December 2020.178 The Government told us that the FCA was “the best of all worlds”,179 combining elements of the ‘maximum facilitation’ option and the ‘customs partnership’ option, both proposed by the Government in its August 2017 White Paper Future customs arrangements—a future partnership paper.180 The FCA aims to “remove the need for customs checks and controls between the UK and the EU as if they were a combined customs territory”, and “would enable the UK to control its own tariffs for trade with the rest of the world”.181 The EU’s initial response to this proposal is considered later in this chapter. The main features of the FCA are set out in Box 3.
Box 3: The Facilitated Customs Arrangement
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The UK Government’s suggestion is for the proposed Facilitated Customs Arrangement to be negotiated in combination with a UK-EU free trade area. Together they would cover the following elements:
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Source: HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593, July 2018: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018]
127.Mr Stride explained that the FCA could be divided “conceptually in two parts: An inner part and an outer part”.184 The inner part referred to trade with the EU27, where “we will have frictionless trade without customs arrangements in place”, based on the common rulebook which “covers the regulatory alignment issues, on goods and agricultural products and on having a free trade area”. This would mean “no tariffs between us and the EU27”.185 Robin Walker MP clarified that this arrangement would only extend to “the areas that are required to avoid friction at the border”, and would not involve “maintaining dynamic alignment with the whole of the acquis”.186
128.The outer part of the FCA, Mr Stride told us, referred to the UK’s international trade with non-EU countries, for which the UK would “in effect … act as the customs agent for the EU27 at our border, and we would apply the EU’s tariff at that point”.187 Wherever the Government was “confident” of the good’s destination, it would charge either the EU or the UK tariff level at the border.188 Mr Stride explained:
“If you cannot be certain about the ultimate destination of goods coming in … goods coming into the UK where the UK tariff was lower than the EU tariff would pay the higher EU tariff, but they would be able to reclaim the difference once they had proved to us that those goods did indeed have their final destination as the United Kingdom”.189
129.Ms Morley observed that the FCA was “principally the same as the proposed Customs Partnership Arrangement”.190 Mr Adams characterised the customs partnership as “an attempt to square the circle of an autonomous UK tariff policy and a frictionless, non-existent internal border with the EU”. This, he said, “would resemble being in the single market for goods”.191 Mr Lowe thought that a customs partnership was “essentially a customs union with the option to diverge, as a clever means of still being able to have a fully independent trade policy”.192 Dr Karlsson, however, cautioned that “it is very difficult for a customs administrator to operate different operational models towards different trading partners. It is also extremely difficult over time.”193 This mechanism and the tracking of goods will be considered in further detail later in this chapter.
130.Mr Stride stressed the differences between the FCA and the Government’s earlier proposal, saying that the new FCA focused more on trusted trader schemes rather than relying on the rebate system.194
Authorised Economic Operators and other trusted trader schemes
131.Authorised Economic Operators (AEOs) and other trusted trader schemes play a potentially significant role in facilitating the operation of a parallel UK and EU tariff policy, as proposed under the FCA.
132.As described in Chapter 3, uptake in the UK of the current AEO scheme is low, because of the small margin of improvement over baseline conditions, and because obtaining accreditation under the existing AEO scheme can be an onerous process for businesses, which sometimes outweighs the benefits of the facilitations obtained. In its latest White Paper, however, the Government proposes that the UK and EU “agree a new trusted trader scheme to allow firms to pay the correct tariff at the UK border without needing to engage with the repayment mechanism. This is most likely to be relevant to finished goods.”195
Possible shape of a new trusted trader scheme
133.Our witnesses provided suggestions for what a new trusted trader scheme could look like.
134.First, Ms Morley said that trusted trader schemes could expand to certify traders in the whole supply chain.196 Mr Adams agreed that any new scheme should cover the supply chain and said that, in order to manage the scope for fraud and/or error, “there would either need to be an agreed system of distributing liability, or potentially an obligation that any businesses in a distribution chain beyond the importer of record must also have credentialed status for self-certification”.197 Ms Morley said that “part of the benefits given to those traders could be no checks—you are a trusted trader; it is all done on audit”. Such a scheme would be based on self-policing, alongside regular audit: “You are audited quite rigorously from time to time to make sure that you are still doing what you are supposed to do.”198
135.Second, Mr Owen and Dr Karlsson suggested lowering the threshold for entry into the AEO programme to facilitate the participation of SMEs. The AEO system currently operated by the UK and the EU was a ten-year old “legacy system”.199 There were newer types of trusted trader programmes, which, Dr Karlsson estimated, operated at approximately “25% of today’s costs” and could be established within two to three years.200 Newer programmes were in use in Brazil and Australia and included different tiers for “different types of companies”.201 Dr Karlsson suggested that a new UK programme “could be designed to be very similar to VAT registration at the lowest levels to make SMEs a part of it”.202 Mr Owen explained that in the Australian system, “at the lowest tier you just have to complete a self-assessment and you can get a basic level with basic benefits. Then, the more you commit to auditing and sharing information … the more benefits you can unlock. It is a tiered system.”203 Such extended compliance activities, however, were “more intrusive and costly” for businesses.204
136.Third, according to Ms Morley, a new trusted trader scheme could be expanded to include agricultural produce, which accounts for the majority of checks at the border.205 This would mean “not being checked and not needing a border inspection post because you are a trusted trader”. In this case “you are offering everyone the same benefit, so long as they reach a certain standard”.206
137.Fourth, there is the possibility of streamlining. The Freight Transport Association highlighted “the confusions, duplications, and complexity”207 of current processes, and Mr Warwick noted that the UK required six pieces of evidence to be submitted for an AEO application, including one form of 17 pages. He suggested that “streamlining the process for applying in this country would be an easy fix”.208 As set out in Chapter 3, the audit trail required for registering might be difficult to obtain for businesses that had only traded with the EU before.209 Mr Adams therefore thought there would be a need to allow for “some proxy for that import/export pattern” to be used, “in order to audit them for this status”.210
138.Mutual recognition of the UK’s new AEO scheme with the EU would be as important under the FCA as under a ‘no deal’ scenario (see Chapter 4). Mr Lowe thought that mutual recognition was “far from a given”.211 Mr Owen agreed that this was “the big caveat” to the AEO scheme: “To have any value for UK-EU trade it has to be mutually recognised by the EU.”212 The Freight Transport Association and the Turkish Industry & Business Association (TÜSIAD) shared the view of the importance of mutual recognition for AEO programmes.213 No such agreement had yet been signed between the EU and Turkey.214 Mr Stride told us that “we have to end up with mutual recognition between ourselves and the EU27 on AEOs”, and said that this would form part of the negotiations.215
139.Summarising the significance of trusted trader schemes for the UK after Brexit, Ms Morley said the AEO scheme was “a facilitator for Brexit”, which could be used by “a great many more companies”.216 Nevertheless, she highlighted that the process of becoming a trusted trader “requires effort” and may be seen by some as “either too hard or too costly”.217 Mr Owen was also cautious: “Yes, there is potential in the trusted trader schemes and there are possible benefits that you can unlock, but there are big caveats. It is far from a silver bullet to the Brexit problem. It has long-term benefits, but you could not pin your hopes on it for 2020 or shortly afterwards.”218
Tracking of goods
140.The Government’s White Paper proposes a distinction between goods that are intended for the UK market and those that are intended for the EU market. Depending on their final destination, a different tariff would need to be paid. The White Paper explains the concept as follows:
“(1) Where a good reaches the UK border, and the destination can be robustly demonstrated by a trusted trader, it will pay the UK tariff if it is destined for the UK and the EU tariff if it is destined for the EU. This is most likely to be relevant to finished goods; and
(2) Where a good reaches the UK border and the destination cannot be robustly demonstrated at the point of import, it will pay the higher of the UK or EU tariff. Where the good’s destination is later identified to be a lower tariff jurisdiction, it would be eligible for a repayment from the UK Government equal to the difference between the two tariffs. This is most likely to be relevant to intermediate goods. Under the UK’s proposals, it is estimated up to 96 per cent of UK goods trade would be most likely to be able to pay the correct or no tariff upfront, with the remainder most likely to use the repayment mechanism.”219
We note that the figure of 96% refers to total UK trade in goods, rather than to imports only. The proportion of goods imports where the correct tariff could be paid at the border would therefore be lower. Mr Oliver Wright, writing in The Times, has estimated that in respect of goods imports only, “the percentage of goods requiring additional checks and monitoring would be about four times the estimate”.220
141.The Government foresees that businesses included in new trusted trader schemes would be able to pay the correct tariff at the UK border and not need to use the repayment mechanism.221 Mr Harra expected that most businesses would be covered by such a trusted trader scheme, and therefore only a small proportion would “have to engage with the repayment mechanism to adjust the tariff to the correct level”.222 Ms Morley, however, thought that the difficulties of becoming a trusted trader were such that “the majority of UK Traders” would be left outside both the trusted trader and the Special Procedures scheme,223 and thus “unable to access the reduced duty rates except on a reclaim basis”.224
142.Mr Adams said that “the principle of varying tariff levels for otherwise identical goods is not in itself unusual”, and was commonly operated under free trade agreements between WTO members. The Facilitated Customs Arrangement, however, “proposes to vary tariffs not on the basis of the origin of the import, but its destination within an integrated trading space. This is immediately more complex because it can imply different destinations for a single consolidated consignment at the point of import.”225 Dr Karlsson agreed that “keeping track” of products that were exported, manufactured and assembled multiple times was “a complex activity”.226 Mr Adams added that “the goods would not be ‘tracked’ in real time, but via a documentary evidence chain that established either ex ante or post facto their point of consumption/sufficient transformation”.227 Mr Lowe thought that “at the moment, it is difficult to see what that effective tracking mechanism would look like”.228
143.Ms Morley agreed that “the difficulty will be tracking the goods”.229 While AEOs or other trusted traders “could use existing methods to track the goods”, for other businesses “it is hard to see how a sufficiently robust tracking mechanism could be created or policed”.230 Dr Holmes cautioned that this would be particularly difficult for intermediate goods: “There would be extremely challenging burdens on firms who might themselves not be importing or exporting but are in the middle of value chains. It would be hard for firms to know where their products would end up when they are buying and selling intermediate goods.”231
144.Witnesses raised a number of specific questions over the tracking of goods.
Question 1: Who carries liability for ensuring compliance?
145.Our witnesses thought that the Government’s proposal did not make clear how goods intended for the UK or for the EU would be separated, and who would be responsible for making such a separation. Mr Hookham said that members of his association felt the proposal “puts a lot of expectation and requirement on businesses to make that separation”, and that it required businesses to “take that responsibility for keeping UK-only goods separated”.232 The Freight Transport Association thought the importer of goods was “placed in the position of Customs agent”,233 which represented “an onerous new liability for businesses, especially smaller importers”.234 Ms Morley therefore asked: “Where in the supply chain would the liability end?”235 Mr Stride said an option would be “making the end importer in the United Kingdom liable and responsible for ensuring that those goods have paid the appropriate duty”.236 The Freight Transport Association warned that “the consequences of failing to make the correct assessment, and the time constraints under which they must be made is not clear from the description available”.237
Question 2: Does this create a fraud risk?
146.Mr Adams told us that under the proposed FCA, “the burden would essentially be on the UK to prove that a good had been placed on the UK … retail single market”. Unless there was proof of “the point of consumption … the prospect of the good being moved into the single market remains a fraud risk for the EU”.238 Mr Broadley and Mr Lowe agreed.239 Ms Morley told us that if UK duties did not differ “significantly” from those of the EU, there would be less of an incentive for fraud. In cases of greater divergence between tariff levels, “you are creating a situation that could lead to fraud. It just depends on how many current tariffs you decide to alter.”240
147.Furthermore, despite trader systems being able to track the use of goods and this being audited by Customs authorities, Ms Morley said that “once in free circulation and in use, they can go anywhere”.241 She thought that in the absence of an adequate tracking mechanism, “fraud would be easy”.242
Question 3: Could goods be funnelled to the EU via the UK?
148.The difficulty in effectively tracking goods also arose with regard to tariff rate quotas (TRQs). Mr Lowe said that even once the UK had become a separate customs entity and WTO member, it would have to work with the EU to manage TRQs in respect of third countries:
“Otherwise, you could have a situation where the EU has hit its limit on a tariff rate quota for, say, lamb coming in at a preferential rate, but the UK has not. If you were the exporter from, say, New Zealand, it could just be funnelled through the UK, and once it was in free circulation it could go into the EU.”243
Similarly, Mr Meaney gave as an example “the famous chlorine-washed chicken coming in from the US” under a trade agreement with the UK, where there was “a risk that this type of food product ends up somehow in the EU supply chain because of the way in which this model is working”.244
149.This would similarly apply to anti-dumping measures or trade defence instruments. Mr Lowe gave an example of the UK hypothetically levying “different rates on, say, imported Chinese steel, or no tariffs at all”.245 Without checks at the border, steel imported into the UK “could then funnel into the EU”.246 Mr Stride shared this concern, and said that in these cases “co-operation and having access to each other’s systems and processes will be really important”. This might be “a challenge”, resulting in “a discrete set of goods where, as a consequence, the relative ease of tracking and intercepting is important”.247
Question 4: Could the model give the UK a competitive advantage over the EU?
150.Robin Walker MP explained that, in comparison to the previous customs partnership model, the FCA only required a good to be tracked to the point of substantive transformation, not to consumption: “If that process took place in the UK, a UK tariff would be eligible.”248 Mr Stride added that “the point at which we would trigger the ability to reclaim a tariff difference, if there was one, would be at the earliest stage of the supply chain”. He thought that “it would not be absolutely straightforward, but it is manageable”.249 Mr Walker said that this “would need to be agreed between the UK and the EU”, and that the UK Government proposed “a detailed negotiation on how that arrangement will work and how it will recognise, on an agreed basis, substantial transformation, so that we can then have differential tariff collection”.250
151.Mr Adams told us that the FCA would “require an audit system for proving the location in which a good is consumed or sufficiently transformed”, alongside a self-certification system. The determination of consumption or sufficient transformation could be done by “using a methodology similar to that used for determining origin”.251
152.Mr Lowe argued, however, that in the absence of an effective tracking process, the UK car industry, for instance, could gain a competitive advantage over that of the EU, by passing on a lower cost for the import of an intermediate good to the manufacturer, “who then benefits from that and is selling across Europe”.252 Mr Adams said that “the EU may be concerned that the dual tariff system operated as a de facto subsidy to UK importers by allowing them to import for the domestic UK market at a lower price that allows them to cross subsidise onward exports of the same good to the EU”.253
Revenue sharing
153.The FCA proposal foresees the UK collecting tariffs on behalf of the EU, which would then, on the basis of a negotiated agreement, be in part or fully transferred to the EU. Dr Holmes pointed out that revenue sharing was rare and difficult in customs unions, noting there was none between the EU and Turkey.254 Mr Owen told us: “The EU will be concerned to understand how a third party that is potentially outside its institutions will be able to collect its revenue.”255 The EU’s initial response to the UK’s proposed Facilitated Customs Arrangement is considered at the end of this chapter.
Costs
154.Mr Harra told us that the FCA added “a small amount of admin burden to UK-rest of the world importers, because instead of just paying the tariff they will have to decide which of two tariffs is the correct tariff to pay”.256 He estimated this additional amount to be around £700 million a year for UK trade “based on a static view of trade in 2017”,257 which would be “significantly less than if there were customs controls between the UK and the EU”,258 the cost of which HMRC placed at between £17 billion and £20 billion per year.259
155.A number of witnesses pointed to the voluntary nature of the rebate system. Mr Harra contended that businesses would face “no net cost”, but rather “a net advantage”, as they would only engage with the repayment system “if the tariff differential makes it worth their while”.260 Mr Lowe agreed that the system could be “cost neutral for business”, assuming the maximum tariff level would not be higher than now.261 Mr Stephens concurred with this assessment and added that those businesses wanting to benefit from potentially lower tariffs “will need to maintain staff sufficient to manage the documentation and/or maintain the necessary audit trail for AEO/Trusted Trader status”.262 Ms Morley, however, thought that asking businesses “to pay more and then claim it back” had “a cash-flow implication and an administrative cost”. She said that current rebate systems for reclaiming accidentally overpaid duties were “slow and … cumbersome”.263
156.For SMEs, gaining an understanding of the requirements under the FCA would be particularly difficult. Ms Morley said: “They have no one who actually understands customs now. They rely entirely on agents and freight agents, rightly or wrongly, and may or may not get it right by doing so, but they are relying on others. They do not even really know that they are doing customs work.”264 In contrast, big car manufacturers, for instance, “probably have a department of customs specialists who can be on top of it”.265 The Freight Transport Association told us that, if SMEs had to take on the role of customs agents under the FCA, they might be “required to secure bank covenants or bonds to the value of twice their estimated monthly declarations. This would be a major extension of financial resources for most SMEs and the availability of such insurances or covenants and the ability of SMEs to afford them needs to be better understood.”266
157.Another point raised by Ms Morley was that it was unclear what ‘phased introduction’ of the FCA meant. It was therefore “difficult to say how difficult and expensive this would be for Trade and Government”.267 The Government’s White Paper, Ms Morley said, “again ignores the cost to businesses of running two systems for their global trade instead of one”.268
Negotiations of free trade agreements (FTAs) with third countries
158.Witnesses highlighted two areas related to the UK’s ability to negotiate FTAs with third countries—tariffs and regulatory issues.
159.First, on tariffs, Mr Adams told us that the UK was only able to offer contingent benefits under the FCA, which would be “very hard to see … not turning into a big drop-off in the utilisation of UK preferential tariffs and probably a hindrance for the UK in negotiating free trade agreements on goods with third countries”. He explained that UK trading partners might take the view: “Well, that’s a contingent benefit that you’re offering me, and I’m offering you a real tariff cut at the border. You’re trying to sell me a rebate system.”269 A tariff cut at the border and a “tariff cut in the form of a rebate system … those two things are not the same”.270
160.Mr Lowe, in contrast, argued that “all preferential access afforded by trade agreements is a contingent benefit. You still have to qualify for it, so there is already an admin cost that comes with utilising a preference.” Nevertheless, he agreed that “the uptake of this zero-tariff rate would potentially be lower”, which made it “slightly less attractive if you are attempting to negotiate an agreement with a third country”.271 Ms Renison told us that “a lot of companies do not even use existing trading agreements and tariff preferences”. She estimated that of the Institute for Directors’ membership only 15% had made use of existing trade agreements.272
161.Ms Renison thought that among tariffs, those on industrial goods were not the main element in free trade agreement negotiations. They were “not really used as pieces of leverage in negotiations perhaps in the way agricultural goods are”, since tariffs had “been brought down to about 2% to 3% on average” over the past ten years. Cars and textiles were exceptions to this general trend.273 She explained that agricultural goods, in particular when the country was “not a big producer, or it is not a competitive item for a country” were “used as a piece of bartering leverage”. A country looking to negotiate a trade agreement was “quite happy to bring down the tariff on olive oil if they do not produce any of their own. There would still be a substantial amount of leverage in a lot of the tariffs that remain.”274
162.Robin Walker MP told us:
“You need to look at the volume of trade that we have with a number of significant third countries that are able to trade with us on the basis of current standards but that potentially face tariff barriers in trading with the UK as a result of our application of the Common External Tariff. There is no reason why we could not remove those tariff barriers and significantly increase the volume of trade by doing that.”275
163.Mr Walker also thought that “the combination of divergence on tariffs in potential individual agreements and a more open approach to services can give us a lot to negotiate with”.276 Mr Adams agreed, saying that “the quality of the UK’s tariff reduction and services binding offer” were “likely to be the focus for most trading partners”.277
164.Mr Lowe concurred that the UK would “still be able to negotiate on services, intellectual property, procurement and movement of people in terms of professional visas and the like”.278 There were caveats, however: FTAs did “very little” on services,279 and “there are no real examples of, say, a services-only bilateral free trade agreement”, apart from the plurilateral trade in services agreement currently being negotiated at the WTO, “which the UK might be able to engage with”.280
165.Second, on regulations, Robin Walker MP described “the idea that a common rulebook and common standards on the agricultural and industrial products related to avoiding a frictionless border would prevent us doing trade deals with third countries” as a myth.281 Mr Adams agreed and said that although “regulatory alignment is now a part of most advanced FTAs, the level of detail in such commitments varies”.282 He told us that “there are likely to be many areas where commitments of this kind are compatible with alignment with the EU rulebook on product standards, state aid and competition”.283 In some cases the UK could even “leverage mutual recognitions secured by the EU for itself”.284 Nevertheless, Mr Adams pointed out that regulatory convergence was an essential element for the FCA to work: “It is very difficult to see how you can have a frictionless border while not being an EU member state without accepting that you are a regulatory satellite of the European Union.”285
166.Sanitary and Phytosanitary (SPS) measures286 were likely to pose more of a challenge in FTA negotiations. Mr Lowe used the example of US beef and chlorinated chicken, which “has become a joke, but it is actually an aggressive ask of the US”.287 The US is currently unable to export beef and chicken to the EU under the EU’s SPS regime. Mr Lowe thought that, in possible future trade negotiations, “that is one of the trade-offs that the Government have to work through”.288 Mr Adams agreed that the UK “could also expect to be challenged [by the US] to revise specific practices”, for instance on agri-food standards, and “find itself constrained in doing so”.289
167.The Minister, Robin Walker MP, said:
“I do not think there is the political appetite in this country to do trade deals that would lower standards of food or product safety. We have to be honest about that in our trade negotiations. We are going to be negotiating on volumes of trade, on removing tariffs and being a champion of free trade in the world, but we are not going to win trade by lowering standards, because that would not be in the interests of the public we represent.”290
Timescale for implementation of the FCA
168.Mr Stride told us that he “could not pin a precise date”291 on the full implementation of the FCA, but that the Government intended to have the repayment system “up and running by the end of 2020”.292 Mr Walker said that “the repayment mechanism is the element of the scheme that might take longest to implement, but it will not be needed until at least the time when we leave the implementation period”.293 This was because the final agreement was “contingent on a number of different factors, not least the negotiation, what it looks like and what the requirements are”.294
169.Mr Thompson also thought that “the operation of a dual tariff should be there by the end of December 2020”, but that the establishment of the repayment mechanism “would take a bit longer”.295 Mr Adams thought it was not unrealistic “that such a system of audit can be developed and implemented over perhaps 12–24 months with sufficient resources”.296
170.The Freight Transport Association thought that “it would be unrealistic to expect” the FCA to be “negotiated and agreed; specified and procured; delivered and tested with sufficient time for User Acceptance Testing by business” by 29 March 2019; and moreover they doubted “whether the proposed 21 month transition implementation period … will be sufficient without herculean effort and unprecedented goodwill on both sides to make it work”.297
171.Mr Thompson pointed to the need for industry to adapt to any new system and said that it “has been clear with us that it takes between 18 and 24 months for it to adapt”.298 Mr Adams found it “hard to judge the time it would take for businesses to understand and adapt to the new protocols”.299
Lack of clarity
172.Our witnesses pointed to the lack of clarity about future arrangements with the EU as one of the main issues preventing UK businesses from preparing for trade with the EU after Brexit. One fundamental element of this was that “terms such as hard border and physical infrastructure” only had “ambiguous definitions”.300
173.Mr Meaney told us that it was “vital … to have a degree of certainty about what the model is going to be … and to have some clarity about which regulations people are going to have to meet”.301 Businesses were telling him:
“We do not have sufficient certainty in order to jump one way or the other. Why would we hire people today to fulfil one set of customs standards if it’s going to be the other one? Why should I invest in a particular facility here in order to cope with volumes of lorries going through the Dover Straits when that might not be necessary?”302
174.Mr Meaney thought that “most people will adapt to whatever model is ultimately put in front of them”. Uncertainty, however, could have a detrimental effect on investment decisions. He therefore concluded: “The quicker we make these decisions, the less likely it is that those things will happen.”303
175.Ms Renison agreed with this assessment:
“The majority of our members will make adjustments when they know how the arrangements have changed … a lot of companies will be waiting to know not only what the technical detailed agreements are, what tariffs are and are not changing, and what the rules of origin look like—forget the outline—but what extra data they have to submit to HMRC.”304
Some work could “probably begin in parallel with the trade agreement”, but “some of it cannot really be prepared for until you have reached an agreement”.305
176.The lack of clarity was of particular concern to small businesses.306 Mr Chris Walker said: “Small businesses with up to 50 people cannot dedicate the resources to spend a lot of time looking at and planning for different scenarios over which they have no influence.”307 Of 150 companies the FSB had contacted, “Not one single company has a [contingency] plan because the uncertainty is too great for them to do anything other than scenario-plan or add risk registers together.”308 Mr Hookham pointed out that the process of “trying to understand exactly what is needed and what systems need to be deployed” had only started recently on the EU side.309
The view from Brussels
177.The future UK-EU customs arrangements form part of the broader UK-EU economic partnership. According to the European Council Guidelines on the framework for the future EU-UK relationship, adopted on 23 March 2018, the European Council is ready “to initiate work towards a balanced, ambitious and wide-ranging free trade agreement (FTA)”.310
178.According to the European Council, this future trade agreement should address, among other things :
“• Trade in goods, with the aim of covering all sectors and seeking to maintain zero tariffs and no quantitative restrictions with appropriate accompanying rules of origin …
- Appropriate customs cooperation, preserving the regulatory and jurisdictional autonomy of the parties and the integrity of the EU Customs Union;
- Disciplines on technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures; [and]
- A framework for voluntary regulatory cooperation.”311
179.The Guidelines further refer to the importance of ensuring “a level playing field”, which aims to “prevent unfair competitive advantage that the UK could enjoy through undercutting of levels of protection with respect to, inter alia, competition and state aid, tax, social, environment and regulatory measures and practices”. The prevention of such a competitive advantage “will require a combination of substantive rules aligned with EU and international standards, adequate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement mechanisms in the agreement as well as Union autonomous remedies, that are all commensurate with the depth and breadth of the EU-UK economic connectedness”.312
180.In evidence to the EU Select Committee on 17 July 2018, Mr Michel Barnier, Chief Negotiator of the European Commission on the UK’s exit from the EU, said the “customs arrangement that we saw in the White Paper is not new as far as we were concerned”, and was only “a little different” from the future partnership paper produced last August. He said that “at the time, with regard to the technical feasibility of such a solution, we said that it would be difficult”.313 The EU did “not want a solution that creates additional problems, red tape and additional burdens for European companies”. We note that additional burdens for EU businesses would be difficult to avoid, given the requirements to track goods and the implications for supply chains, as set out earlier in this chapter. Nevertheless, the EU was “certainly prepared to work on a customs partnership” with the UK, which “could be on top of an ambitious free trade agreement, but … would be in the framework of our current partnerships with other countries”.
181.On 26 July 2018, in an initial reaction to the UK’s proposal to establish a Facilitated Customs Arrangement, Mr Barnier said at a press conference: “The EU cannot—and will not—delegate the application of its customs policy and rules, VAT and excise duty collection to a non-member, who would not be subject to the EU’s governance structures.”314 Any customs union “would come with our Common Commercial Policy for goods”, a point he also made to the Select Committee.315 Any customs arrangement would “also have to be workable and must protect EU and national revenue, without imposing additional costs on businesses and customs authorities”.316
Conclusions and recommendations
182.The objective of the Facilitated Customs Arrangement appears to be to combine the advantages of remaining in a customs union with developing a fully independent trade policy. This involves having different operational models for EU and non-EU trading partners and the levying of tariffs depending on whether goods from non-EU countries are destined for the UK or the EU—all of which is complex.
183.Ministers stressed to us that complexity could be mitigated by a greater role for trusted trader arrangements such as the Authorised Economic Operator (AEO) scheme, and this does indeed offer some opportunities for facilitation.
184.However, the AEO scheme can be difficult to access by small and medium sized enterprises that have so far only traded with the EU. As part of its new AEO scheme under the Facilitated Customs Arrangement, we call on the Government to consider offering different tiers of AEO status, including one that is easy to obtain for SMEs.
185.Signing up to an AEO scheme involves costs for businesses. If the Government wants to ensure that the uptake under the new scheme is higher than under the existing one, it needs to provide guidance to businesses and simplify the process for applying.
186.Mutual recognition of AEO schemes is of utmost importance. We welcome the Government’s intention to negotiate such mutual recognition with the EU.
187.Albeit much lower than under a ‘no deal’ scenario, the Facilitated Customs Arrangement introduces potential additional costs to trade for UK businesses.
188.It is unclear how goods will be tracked under the proposed Facilitated Customs Arrangement, and this is likely to impose additional administrative burdens on businesses. The lack of clarity on the tracking mechanism makes it difficult to assess the extent of that burden. The proposal also raises significant questions around liability, fraud and competitive fairness. We call on the Government to address these questions at the earliest opportunity, and to set out its detailed plans for a tracking mechanism that manages the risk of fraud but also minimises the cost to business.
189.A clear definition of what constitutes ‘sufficient transformation’ of intermediate goods will be important in the tracking of goods. We invite the Government to elaborate on its intended definition and to share with us its analysis of the cost impact that proving sufficient transformation would have on businesses.
190.The repayment mechanism under the FCA is a unique and untested proposition. We are concerned that it will take an unspecified number of years to be developed and that it would only be operational after the implementation of the dual tariff. Only then will businesses be able to benefit fully from new UK trade agreements. We call on the Government to set out a timeline for full implementation, setting out the specific steps it intends to take.
191.The UK Government’s estimate that 96% of UK goods trade would be able to pay the correct or no tariff up front and not go through the repayment mechanism has been challenged. We call on the Government to clarify the methodology it used to arrive at the 96% figure.
192.Tariffs on industrial goods are on average very low. Because of the administrative burdens of engaging with the repayment mechanism under the FCA, preference uptake under UK FTAs could be low and thus reduce the attractiveness of negotiating FTAs with the UK. We call on the Government to explain how it will seek to mitigate this effect.
193.We welcome the Government’s stated intention to uphold current UK food standards and not lower them in free trade agreements with third countries.
194.We are concerned that, only six months before the UK’s exit from the EU, agreement has not yet been reached on the principles underpinning any future customs arrangements. The UK’s proposal under the FCA to collect revenue on behalf of the EU crosses a red line for the EU and has thus been rejected. We urge the Government to set out what options or alternatives it has identified to meet the EU’s concerns.
195.The uncertainty over whether there will be a negotiated agreement between the two sides hinders both UK and EU businesses in their preparations for Brexit. It also adversely affects the ability of UK and EU customs authorities to plan for possible changes. The Government should provide clarity at the earliest possible time.
196.We welcome the EU’s readiness to negotiate a free trade agreement and a customs arrangement with the UK. The two sides should continue to engage in a constructive manner to find a mutually acceptable agreement.
178 HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593 July 2018, pp 15–19: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018]
179 Q 103 (Mel Stride MP) As mentioned in Chapter 1, some of the evidence taken by the Committee was on the Government’s previous options, the customs partnership and the maximum facilitation proposal. Due to the similarity of the FCA and the customs partnership, evidence on the customs-partnership will also be used in this chapter, as and when suitable.
180 HM Government, Future customs arrangements—a future partnership paper, August 2017: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/637748/Future_customs_arrangements_-_a_future_partnership_paper.pdf [accessed 24 August 2018]
181 HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593 July 2018, p 8: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018]
182 HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593 July 2018, p 23: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018]
183 Arrangements for services and financial services are also proposed to form part of the future UK-EU economic partnership, but are separate from the proposed customs arrangement and therefore not considered in this report.
186 Q 101 The Acquis Communautaire refers to the accumulated body of EU law, comprising of all EU treaties, laws, declarations and resolutions, international agreements, measures relating to the common foreign and security policy, justice and home affairs, and judgements of the European Court of Justice. It is binding on all EU Member States.
188 Ibid.
189 Ibid.
195 HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593 July 2018, p 17: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018]
205 Please refer to Chapter 3 for an overview of which goods need to be checked at the border.
219 HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593 July 2018, p 17: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018] ‘Brexit tariffs plan is fanciful, experts warn Theresa May’, The Times (13 August 2018): https://www.thetimes.co.uk/edition/news/brexit-trade-tariffs-plan-is-fanciful-experts-warn-theresa-may-63kb6f5hp [accessed 24 August 2018]
220 ‘Brexit tariffs plan is fanciful, experts warn Theresa May’, The Times (13 August 2018): https://www.thetimes.co.uk/edition/news/brexit-trade-tariffs-plan-is-fanciful-experts-warn-theresa-may-63kb6f5hp [accessed 24 August 2018]
221 HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593, July 2018, p 17 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018]
223 Special procedures are considered in Chapter 3. European Commission, Special Procedures—Title VII UCC/ “Guidance for MSs and Trade” (10 July 2018): https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/guidance_special_procedures_en.pdf [accessed 24 August 2018]
233 In this context, customs agent refers to the role usually assumed by a freight forwarder, who handles customs clearance and procedures on behalf of a trader.
249 Ibid. (Mel Stride MP)
250 Ibid. (Robin Walker MP)
259 Q 85 (Jon Thompson) In evidence to the House of Commons’ Public Accounts Committee, Mr Thompson clarified that the cost to UK businesses under ‘no deal’ would be £18 billion. Oral evidence taken before the Public Accounts Committee, 5 September 2018 (Session 2017–19), Q 157 (Jon Thompson)
265 Ibid. (Susan Morley)
268 Ibid.
273 Q 57 As set out in Chapter 3, the EU MFN average final bound tariff on non-electrical machinery, for instance, is 1.7%; it is 2.4% on electrical machinery; and 3.1% on petroleum. Higher tariffs are levied on textiles (6.6%), clothing (11.5%) and on cars (10%). WTO, World Tariff Profiles, 2018, p 79: https://www.wto.org/english/res_e/booksp_e/tariff_profiles18_e.pdf [accessed 21 August 2018] and European Commission, ‘EU Tariffs’: http://madb.europa.eu/madb/euTariffs.htm?productCode=87032210&country=CN [accessed 24 August 2018]
283 Ibid.
284 Ibid.
286 Sanitary and phytosanitary measures can be put into place to protect human, animal or plant life or health, according to Article 20 of the General Agreement on Tariffs and Trade of the WTO. World Trade Organization, ‘Standards and safety’: https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm4_e.htm [accessed 24 August 2018]
302 Ibid.
303 Ibid.
305 Ibid.
308 Ibid. (Neil Warwick)
310 European Council, European Council (Art. 50) (23 March 2018)—Guidelines (23 March 2018), p 3: http://www.consilium.europa.eu/media/33458/23-euco-art50-guidelines.pdf [accessed 24 August 2018]
311 Ibid., p 4
312 Ibid., p 5
313 Oral evidence taken before the European Union Select Committee, 17 July 2018 (Session 2017–19), Q 2
314 Michel Barnier, ‘Statement at the press conference following his meeting with Dominic Raab, UK Secretary of State for Exiting the EU, 26 July 2018: http://europa.eu/rapid/press-release_SPEECH-18-4704_en.htm [accessed 24 August 2018]
315 Ibid., and oral evidence taken before the European Union Select Committee, 17 July 2018 (Session 2017–19), Q 2
316 Michel Barnier, ‘Statement at the press conference following his meeting with Dominic Raab, UK Secretary of State for Exiting the EU’, 26 July 2018: http://europa.eu/rapid/press-release_SPEECH-18-4704_en.htm [accessed 24 August 2018]