The Government has released its paper on the future for the UK/EU Customs relationship. Yet while the paper gives some further detail, the picture for what the future holds remains murky.
Ensuring the tech sector, alongside other industries with complex supply chains, can easily move goods across borders is vital to market access. 46% of the products UK tech exports head to Europe, and so the importance of getting a customs system right couldn’t be more important.
Today’s publication by the Government of its proposals for the future UK/EU customs system was therefore highly anticipated. Yet while there are positive aspects to what is proposed, a lot remains just as unclear for businesses as when the Prime Minister confirmed the decision to leave the Customs Union in January this year.
The Government’s paper consists of two proposals. The first, referred to as a ‘streamlined customs arrangement’ proposes doing everything possible, on both sides of the negotiations, to reduce friction once the UK leaves the Customs Union.
The second suggestion, called the ‘customs partnership’ involves a wholly new approach, in which the UK and the EU have their own system akin to a customs union. Central to the proposal is to create a way that goods coming into the UK from outside the EU can be prevented from finding their way across the EU border. The Government itself admits that such an approach is “unprecedented” and could be “challenging to implement”.
Below are some of the good, the bad and the intractable issues found within the paper.
Transition (by a different name)
The paper, for the first time, officially confirms that the Government plans a transitional arrangement (referred to in the paper as an ‘interim period’). This is highly welcome and something which techUK has previously said is vital if we are to ensure a smooth progression to a post-Brexit world.
The paper also sets out in more detail what the UK would want from this transition deal, proposing “close association” with the EU Customs Union. In many ways this would replicate the Customs Union in all but name, something that would make sense for business. However, there is one major difference with a full Customs Union membership.
The paper states that, during this interim period, the UK wishes to be able to begin negotiations with other partners about trade deals post Brexit. While the Government would not sign any deals that cut across the UK/EU agreement during this phase (most likely almost any trade deal), it is not clear that the EU would accept such an arrangement. Should the UK be forced to choose between negotiating trade deals or retaining frictionless customs during this interim period it remains highly uncertain what the Government would do. Given the dominance of the EU market for UK tech exports, from the sector’s point of view the latter option seems preferable.
Another key issue for the interim period is how long it will be. The paper does not give a timetable, but briefing around its launch was clear that it will end before the next election, giving a window of three years, though some Ministers reportedly still favour no more than 12 months of transition. Depending on the complexity of the system to be put in place this could create a very challenging timetable for Government and businesses to adapt.
Finally, there remain questions over whether the UK will continue to pay for this access in the same way as it does for membership of the current Customs Union. This is likely to remain a significant political issue throughout negotiations on the agreement that will be in place at the end of March 2019.
Authorised Economic Operators
The ‘streamlined arrangement’ proposal within the paper contains sensible proposals for a post-Customs Union system. In particular it suggests that the Government will seek mutual recognition of Authorised Economic Operator processes, something that techUK called for in April. The use of AEOs will help create smoother processes for businesses which regularly trade across borders. The Government should also consider seeking mutual agreement on other procedures that will help reduce barriers, such as Binding Tariff Information.
Using Tech Solutions
Another thing that techUK called for in its paper on Leaving the Customs Union was for the Government to utilise new technologies such as machine learning, blockchain and automation to help support near-frictionless trade. It is therefore very welcome that the paper recognises just how valuable these processes could be. However, the paper stops short of providing further detail on how it plans to use these technologies and so the devil remains in the detail. To help provide clarity on this issue, techUK has called on the Government to produce a revised Customs 2020 plan. The initial details in the Government’s paper suggests this work is more urgent than ever.
Another positive step in the paper is the recognition of the work left to do. In particular it notes the Government’s plans for White Papers on both a new Customs Bill and a Trade Bill to be produced in the near future, followed by legislation in the autumn. This further work is critical the success of our post-Brexit trade and the context of legislation should help to bring more clarity around the Government’s choices.
The biggest concern for many within this paper is just how far away from it is from a set of concrete. A whole range of post-Brexit issues, including the customs question, remain unclear 14 months after the Referendum. For something as complex and potentially time consuming for business as customs processes, there is little time to waste. The sooner the Government confirms which of the two prosed options is actually intends to pursue the better for business.
The proposed ‘customs partnership’ system fundamentally relies on the idea that goods intended for the UK from outside the EU would not be able to into the EU. The paper proposes a range of options to prevent this, but all risk creating significant additional burdens.
For example, the paper suggests that goods could be “tracked until they reach the end user”. How this would work in practice is unclear and risks products being sold to UK customers having to jump through huge regulatory hoops (or even being individually tagged) in a way that raises complex questions about consumer rights and, possibly, even consumer privacy.
Alternatively, the paper proposes some form of reclaimable tariff, where goods coming into the UK pay the higher of the EU partnership tariff and the UK-only tariff and then businesses can reclaim the difference. Such a system would be a huge additional burden, particularly on small businesses, to be responsible for keeping track of where goods are going and who is the end user. This could have significant cash flow and administrative consequences for UK SMEs.
Throughout the whole of the Brexit negotiations, the overarching concern is timescales. This is particularly the case where new systems need to be built. The Government’s acceptance of a transitional deal is welcome, but continues to focus on the needs of Government, not businesses.
For example, the timetable has significantly reduced the testing time for the new Customs Declaration System currently being built to handle UK customs processes. During its original planning, a testing phase of two-three years was envisaged, now the project will go live only two months before ‘Day 1’. While significant work is being done to make sure this major tech project is ready on time, the training of staff, tweaking of processes and back office function changes needed by businesses interacting with the new system will be severely curtailed. There will almost certainly be a need to rescope the CDS project in the next eighteen months or so as details of the UK-EU customs arrangement are confirmed and HMRC will need to consider a range of models.
Those tech firms helping provide direct to business solutions for the customs processes will also be left with very little time to adapt the products on which millions of businesses up and down the country rely.
That is why ensuring that the timetable the Government sets out is focused on the economic necessities, rather than the political ones is so important if we are to avoid serious turbulence post March 2019.
The final point to note is that, is a significant absence from the Government’s paper. The European Court of Justice does not appear anywhere in the document. The ECJ remains a significant issue for any post-Brexit solution or interim period. Will, for example, will the Government accept ECJ oversight for the ‘close association’ of the interim period? Will it do so for questions of mutual recognition of AEOs? These are fundamental questions about Brexit which will need answers ahead of the interim period being agreed.
Given the importance of securing a clear, well understood transition, the path of least resistance is surely now to accept the ECJ having continued oversight during the interim period. Whether this is politically palatable will be a very different question.
The Government’s paper is very clearly a starting and not an end point in setting out a post-Brexit customs system, and so it is very welcome that the paper sets out a clear commitment to ongoing discussions with businesses. The tech sector, as the fastest growing part of the economy, and as the provider of many of the services that underpin cross border trading, must be an integral part to those discussions.
Finally, however, it is worth recognising that the EU’s response to the paper has been clear: We will discuss customs when we have agreed on the ‘divorce bill’ and EU citizen’s rights questions that make up the first part of the negotiations. The scale of complexity shown in the Government’s customs paper makes it even more clear just how important it is for the negotiations to quickly come to an agreement on these matters, so that the difficult work of creating a workable post-Brexit solution can begin.