Summary of conclusions and recommendations
What if the UK fails to secure a deal with the EU?
1.Trade with the EU on WTO terms would result in additional tariff costs being placed upon businesses. This could lead to an increase in the cost of goods, adversely affecting consumers and the competitiveness of UK businesses. (Paragraph 85)
2.In addition to tariff costs, UK-EU trade on WTO terms would place a considerable administrative burden on businesses involved in that trade on both sides. (Paragraph 86)
3.Customs procedures do not start at the border, but well before that. This requires resources to retrieve the necessary information, even if the information is not ultimately submitted by businesses themselves, but outsourced to customs brokers or freight forwarders. (Paragraph 87)
4.An estimated 145,000 VAT-registered UK businesses trade only with the EU and there may be up to a further 100,000 businesses under the VAT threshold in the same position. In the case of ‘no deal’, they would have to gain expertise in customs procedures, which they do not yet have. While not an insurmountable challenge, this will require them to train or hire skilled staff, which will have cost implications. This might also apply to businesses that have traded with non-EU countries before. (Paragraph 88)
5.Parts of the customs procedure can be outsourced to customs brokers or freight forwarders, but this too will incur a cost. (Paragraph 89)
6.HMRC have estimated that, overall, the cost to UK businesses under ‘no deal’ would be £18 billion per year. We call on HMRC to provide an itemised breakdown of its figures and we urge the Government to set out its plans for supporting businesses in assessing the additional costs they would face under a ‘no deal’ scenario. (Paragraph 90)
7.There are a number of existing customs facilitations, such as trusted trader schemes. While they may be appropriate for larger companies, we urge the Government to take account of the fact that they could place an unacceptably high burden on smaller businesses. (Paragraph 91)
8.Any technological solutions will not wholly remove the need for checks on some goods at the border in the case of ‘no deal’. This is of particular relevance to the Northern Ireland/Ireland border, where trade under WTO rules risks re-introducing a hard border. (Paragraph 92)
9.Trade with the EU under WTO rules would adversely affect UK roll-on/roll-off ports, in particular the Port of Dover. Any checks at the Port would introduce delays and lead to congestion. This poses a significant challenge to just-in time production and to agri-food businesses, and could lead to the disruption of supply chains. (Paragraph 93)
10.Disruption to UK-EU supply chains could decrease the attractiveness of trading with UK businesses. We urge the Government to set out its plans for protecting existing supply chains in the case of ‘no deal’. (Paragraph 94)
11.Container ports, such as the Port of Felixstowe, would be better able to accommodate the need for extra checks, while allowing time for authorities to carry out such checks. While this means that container ports may be able to absorb some trade from roll-on/roll-off ports, the ‘route to market’ of container goods is different to goods that require fast delivery. (Paragraph 95)
12.In summary, the costs, disruption to the flow of goods and, potentially, the imposition of customs checks on the Northern Ireland/Ireland border in the case of ‘no deal’, all underline the need for the Government to succeed in its attempts to reach agreement with the EU on the future economic relationship. (Paragraph 96)
Mitigations open to the UK Government in the event of ‘no deal’
13.There are only limited options available to the Government to mitigate the disruption that would be caused by a ‘no deal’ Brexit. The Government would face a ‘trilemma’ between keeping trade moving, ensuring security of the border, and the collection of revenue. (Paragraph 119)
14.The Government’s position that, in the case of ‘no deal’, customs checks of goods arriving from the EU could be unilaterally suspended, may be in breach of WTO rules. We call on the Government to set out its plans to ensure fair and equal treatment of all imported goods coming in on most-favoured nation terms. (Paragraph 120)
15.Even if the UK decided unilaterally not to introduce customs controls in the case of ‘no deal’, the EU has indicated that it would introduce such controls. As the ports of Dover and Calais operate as a ‘closed-loop system’, this would lead to delays on both sides of the Channel. To mitigate this, the ports of Dover and Calais will need to collaborate on contingency arrangements and we urge the Government to support such efforts. The Government should also articulate a plan for continued co-operation with EU customs authorities in the event of a ‘no deal’ Brexit. (Paragraph 121)
16.Globally, there is a trend towards moving some of the physical controls and risk assessments of goods away from the border. This can assist with the goods clearance process. The Government should consider utilising and building on such systems at the UK-EU border in the case of ‘no deal’. (Paragraph 122)
17.We welcome the Government’s intention to join the EU’s Common Transit Convention after Brexit. (Paragraph 123)
18.We also welcome HMRC’s recruitment of additional staff to prepare for a ‘no deal’ Brexit, and the assurance that these staff will be put to good use even in the (preferred) event of agreement being reached. (Paragraph 124)
19.Customs procedures are likely to rely increasingly on electronic data in the future, rather than on paper declarations. We welcome the Government’s consideration of single-window technology, which would provide traders with a single point of interaction with various UK Government agencies. At the same time, we note that this technology is untested in the UK, will not obviate the need for checks and will not be available in the short term. (Paragraph 125)
The UK Government’s proposed customs arrangement
20.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. (Paragraph 182)
21.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. (Paragraph 183)
22.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. (Paragraph 184)
23.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. (Paragraph 185)
24.Mutual recognition of AEO schemes is of utmost importance. We welcome the Government’s intention to negotiate such mutual recognition with the EU. (Paragraph 186)
25.Albeit much lower than under a ‘no deal’ scenario, the Facilitated Customs Arrangement introduces potential additional costs to trade for UK businesses. (Paragraph 187)
26.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. (Paragraph 188)
27.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. (Paragraph 189)
28.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. (Paragraph 190)
29.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. (Paragraph 191)
30.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. (Paragraph 192)
31.We welcome the Government’s stated intention to uphold current UK food standards and not lower them in free trade agreements with third countries. (Paragraph 193)
32.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. (Paragraph 194)
33.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. (Paragraph 195)
34.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. (Paragraph 196)