Cost of post-Brexit Customs Reform Could Be Higher Than £20bn: Longer Transitional Period Also Required

• The additional costs arising from post-Brexit customs changes could be higher than the £20bn estimated by HMRC, RSM has warned.
• Commenting on the post-Brexit customs plans being considered by the Government, Brad Ashton, indirect tax partner at RSM said:

‘The Government set the ball rolling in August last year when it published a future partnership paper outlining its then view of the future of customs arrangements with the EU.  The paper outlined two potential positions that currently do not exist: a ‘highly streamlined customs arrangement’ or a ‘new customs partnership with the EU’.  Since publication, the highly streamlined customs arrangement approach appears to have been adopted by the ‘leave’ side of the Brexit debate and morphed into the Max Fac option.

‘The new customs partnership approach would require the UK to implement and operate a customs process for imports that aligns with the EU’s for goods that are destined for the EU, whilst the Max Fac suggestion is a development of the highly streamlined customs arrangement laid out by the Government last August.

‘At its heart, the Max Fac option is a technology driven suggestion in that it would intend to streamline and simplify customs arrangements between the UK and EU requirements, leaving as few additional requirements on UK-EU trade as possible.  This would require the agreement and implementation of new, unilateral facilitations to reduce and remove customs formalities and implement technology-based solutions to comply with customs procedures.

‘The technology this approach would rely on either does not currently exist or, where it does exist the EU would have to adopt it at the same time in order for the benefits to be realised.  Significantly, the Max Fac approach does not overcome the issue of customs and border checks at the Irish land border –  a critical objective of the withdrawal negotiations.

‘Ultimately, the lead time required for either solution suggests that we may see a need to agree an extension to the transition period, so the UK and EU can negotiate a mutually acceptable approach; something which is not currently on the table.

‘The Irish land border remains the consistent issue to be overcome in the negotiations around the future customs relationships.  As a result of the impasse, the UK has agreed a ‘backstop’ position to avoid a hard Irish Border that should be included in the draft Brexit treaty. The intention is that this will apply only in the absence of another solution agreed in negotiations.

‘What has been lost in the debate to date are the practical implications for UK and EU businesses. This has been brought into sharp focus by recent comments by the chief executive of HMRC before the Treasury Select Committee regarding the additional costs and compliance obligations.

‘UK businesses sourcing goods from the EU under the post-Brexit customs arrangements being debated would still be required to clear the goods through Customs and make a customs declaration; the EU supplier would be required to make a corresponding export declaration from the member state of export.  The opposite scenario would apply where a UK business exports to an EU customer.

‘Whilst HMRC have taken a rough median cost of £32.50 for a customs declaration, the actual cost is more likely closer to £40 – costs for similar customs declarations in the EU tend to be higher. Based on HMRC’s assumptions around the number of export consignments, the additional costs would be somewhere between £19bn and £23bn.

‘The overriding point is that business should expect additional costs and compliance obligations relating to the movement of goods between the UK and EU regardless of what trading agreement is ultimately agreed – or not.’

• The additional costs arising from post-Brexit customs changes could be higher than the £20bn estimated by HMRC, RSM has warned.
• Commenting on the post-Brexit customs plans being considered by the Government, Brad Ashton, indirect tax partner at RSM said:

‘The Government set the ball rolling in August last year when it published a future partnership paper outlining its then view of the future of customs arrangements with the EU.  The paper outlined two potential positions that currently do not exist: a ‘highly streamlined customs arrangement’ or a ‘new customs partnership with the EU’.  Since publication, the highly streamlined customs arrangement approach appears to have been adopted by the ‘leave’ side of the Brexit debate and morphed into the Max Fac option.

‘The new customs partnership approach would require the UK to implement and operate a customs process for imports that aligns with the EU’s for goods that are destined for the EU, whilst the Max Fac suggestion is a development of the highly streamlined customs arrangement laid out by the Government last August.

‘At its heart, the Max Fac option is a technology driven suggestion in that it would intend to streamline and simplify customs arrangements between the UK and EU requirements, leaving as few additional requirements on UK-EU trade as possible.  This would require the agreement and implementation of new, unilateral facilitations to reduce and remove customs formalities and implement technology-based solutions to comply with customs procedures.

‘The technology this approach would rely on either does not currently exist or, where it does exist the EU would have to adopt it at the same time in order for the benefits to be realised.  Significantly, the Max Fac approach does not overcome the issue of customs and border checks at the Irish land border –  a critical objective of the withdrawal negotiations.

‘Ultimately, the lead time required for either solution suggests that we may see a need to agree an extension to the transition period, so the UK and EU can negotiate a mutually acceptable approach; something which is not currently on the table.

‘The Irish land border remains the consistent issue to be overcome in the negotiations around the future customs relationships.  As a result of the impasse, the UK has agreed a ‘backstop’ position to avoid a hard Irish Border that should be included in the draft Brexit treaty. The intention is that this will apply only in the absence of another solution agreed in negotiations.

‘What has been lost in the debate to date are the practical implications for UK and EU businesses. This has been brought into sharp focus by recent comments by the chief executive of HMRC before the Treasury Select Committee regarding the additional costs and compliance obligations.

‘UK businesses sourcing goods from the EU under the post-Brexit customs arrangements being debated would still be required to clear the goods through Customs and make a customs declaration; the EU supplier would be required to make a corresponding export declaration from the member state of export.  The opposite scenario would apply where a UK business exports to an EU customer.

‘Whilst HMRC have taken a rough median cost of £32.50 for a customs declaration, the actual cost is more likely closer to £40 – costs for similar customs declarations in the EU tend to be higher. Based on HMRC’s assumptions around the number of export consignments, the additional costs would be somewhere between £19bn and £23bn.

‘The overriding point is that business should expect additional costs and compliance obligations relating to the movement of goods between the UK and EU regardless of what trading agreement is ultimately agreed – or not.’