10 October 2017
The UK has released a white paper examining possibilities for its post-Brexit customs system once it leaves the EU’s customs union, and a more revealing report by Ireland’s Revenue has added further detail.
The main problems for the UK are a lack of customs capacity and what to do with the land border between the UK and Ireland. A transitional deal should stave off these problems until at least 2021.
"Traders that currently trade only with the EU will be subject to customs declarations and customs checks for the first time," the UK customs white paper states. "The impact is likely to be greatest where goods are travelling in vehicles."
The paper rightly identifies that long queues on roads and in ports "would not be desirable" and therefore suggests that presentation of goods will take place inland, in huge lorry parks. This explains why the government has not begun the task of procuring land on the south coast of England to increase customs capacity.
However, with revenue authority HMRC having suffered more than a decade of spending cuts, there is simply not the capacity to deal with the huge extra customs workload that Brexit will bring. More than half (53%) of the UK’s imported goods and services come from the EU.
"For those businesses not eligible for an exemption, the UK will explore how to ensure that administrative processes could be very significantly streamlined, including for 'trusted traders’ on either side of the border," states point 5.24 of the UK paper. "This could, for example, allow for simplified customs procedures, such as reduced declaration requirements and periodic payment of duty."
Richard Asquith, vice president of global indirect tax at tax software provider Avalara, said: "Though the new trusted trader’ status for regular cross-border merchants will simplify customs procedures, this may leave some scope for VAT fraud."
The prospect of 'no deal’
Pressure on Prime Minister Theresa May from within her own Conservative party – including a number of people lining up bids to usurp her – has tied her to a course which will see the UK leave the customs union and EU single market, and potentially be left to trade with the EU under WTO terms. She also suggested that negotiating the deal will go down to the wire.
"We are negotiating a deal," she told Parliament. "We will not have negotiated that deal until, I suspect, close to the end of that period that’s been set aside for it."
While she has been able to persuade more hardline Brexit supporters that a transitional deal of two years – perhaps more, as she alluded to in her speech on October 9 – is in the UK’s interests, she has yet to prepare Eurosceptic politicians, let alone members of the public who voted to leave, for the fact that Brexit could well prove to have extremely negative consequences.
May and her government talk of "creative" solutions, but this is really a way of evading questions about the fact that Brexit will make life in the UK harder for both citizens and businesses.
By releasing the two white papers – one on customs and the other on trade – the government showed that it has started to prepare for the very real possibility that it will not reach a deal with the EU, leaving thousands of agreements, regulations and conventions up in the air from 2019 or 2021.
"While I believe it is profoundly in all our interests for the negotiations to succeed, it is also our responsibility as a government to prepare for every eventuality, so that is what we are doing," said May. "These white papers also support that work, including setting out steps to minimise disruption for businesses and travellers."
Each round of Brexit negotiations has so far been marked by the UK Secretary of State for Exiting the European Union David Davis praising progress made in the talks, swiftly followed by the EU’s lead negotiator, Michel Barnier, saying the exact opposite: that the UK is uncertain of its own negotiating position and talks cannot make real progress until it is.
Ireland and the UK land border
One of the most contentious, yet often overlooked, elements of Brexit is the border between Northern Ireland, which is part of the UK, and Ireland. A 'hard border’ with passport and customs checks would be seen by many as a contravention of the Good Friday Agreement, which brought the Troubles to an end.
"The UK government’s clear priority in devising new border arrangements is to respect the strong desire from all parties and all parts of the community in Northern Ireland and Ireland to avoid any return to a hard border, and to maintain as seamless and frictionless a border as possible," states the UK white paper.
However, an internal report by Irish Revenue, leaked to state broadcaster RTÉ, has said that an open customs border after Brexit is "impossible", and has set out the enormous physical and economic impact which could be visited on Ireland’s customs infrastructure.
Revenue is preparing for an 800% increase in the volume of customs declarations it will receive, and plans to beef up ports and airports as well as hiring many more staff. It seems that the report suggests it is "naïve" to think that Ireland and the UK can find a unique arrangement to keep the border open.
"Once negotiations are completed ... the UK will become a third country for customs purposes and the associated formalities will become unavoidable," states the Irish report.
"While this will affect all member states, the effect will be more profound on Ireland as the only EU country to have a land border with the UK."
Traders sending goods into the UK will need various pieces of paperwork including an ENS or a safety and security entry summary declaration. An ENS contains information on the companies sending and receiving goods, the carrier, transport documents, and a detailed description of the goods and where they were loaded and unloaded.
Ireland imported €17.8bn (US$21bn) of goods from the UK in 2015.
"As all of these goods will be subject to the Customs Import Procedure in the post-Brexit era, the administrative and fiscal burden on the traders involved cannot be underestimated," states the draft.
The UK government has been keen to emphasise that it does not want an agreement to the EU similar to that which Norway and Switzerland have, or the one which Canada recently negotiated. Put simply, it believes that such a deal would not be carrying out the will of the people who voted to leave the EU.
However, such an arrangement in the future could be possible when the political landscape changes.
The Irish report says that such an agreement "is conceivable", but that agreeing upon it and implementing it during the Article 50 timetable (the two-year period of which more than six months have already elapsed) would be "extremely challenging".
Britain still clueless on its own exit
The UK remains ludicrously unprepared for Brexit. Tax directors of businesses have been banging their heads against walls watching the government fail to grasp the scale of the task, and this first real look at the customs situation if there is no deal should have been prepared more than a year ago.
It is still short on detail, and the fact that point 5.12 and point 5.13 are identical – leading readers to question if it was properly proofread – is a poignant analogy for the UK’s response to the unexpected Brexit vote. Irish businesses can draw comfort from the fact that Revenue does at least seem to grasp the scale of the problem.
There was no preparation for leaving the EU done by the previous Prime Minister David Cameron, who knew he would step down if the vote went the way it did. While Theresa May inherited this mess, little has been done to rectify it.
She was not obliged to trigger Article 50, which started the two-year process of leaving the EU, as early as March this year, but did so for political reasons. Her own party has not agreed on what it wants from Brexit, which makes negotiating it next to impossible, and instead of helping their leader most of the cabinet seem to instead be focused on replacing her, as a failed coup last week demonstrated.
In any case, the EU does not lose in negotiations – as the US and China have found out. The idea of the UK getting a 'good deal’ is next to impossible. Any deal will be in the best interests of the EU, or it will not be sanctioned by Brussels and both sides will suffer. Either way, the UK will bear the brunt of the pain.
The above article was published on www.internationaltaxreview.com on 10 October 2017 and has been republished with the approval of the Publisher.