In the month that the Government is expected to trigger Article 50 to start the process of the UK's exit from the EU, a report from the House of Commons International Trade Committee (the International Trade Committee) has stated that clarifying the arrangements for customs and border arrangements in the UK and the intensity of customs checks "is a matter of urgency now".
In her keynote Brexit speech at Lancaster House in January, the Prime Minister explained:
"I do want us to have a customs agreement with the EU. Whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends."
In a White Paper that followed in February, the Government stated that it would prioritise securing "the freest and most frictionless trade possible in goods (…) between the UK and the EU". In doing so the Government clarified that it would not be seeking membership of the Single Market, but would pursue "a new strategic partnership with the EU", including "an ambitious and comprehensive Free Trade Agreement" and "a new customs agreement".
However, the current position as to what such a customs agreement or arrangement will entail remains unclear, with the International Trade Committee underlining that such an arrangement has thus far been described "only in very vague terms". The committee underlines that the current uncertainty is delaying investment decisions in the UK, particularly in the manufacturing sector.
The Current EU Customs Union
A customs union is an arrangement between two or more countries that allows goods to circulate freely within the area of the customs union, by the introduction of a common external tariff for its members and the removal of tariffs between them. It does not cover trade in services or free movement of capital or people.
The EU Customs Union comprises the 28 EU Member States, with Turkey, San Marino and Andorra also having their own customs unions with the EU.
Goods in the EU Customs Union can move between the individual countries forming the union without tariffs, quotas or routine customs controls. Tariffs, quotas and customs controls for goods moving between the EU and non-EU countries are determined at EU, rather than national, level. Under the EU Customs Union, customs policy is the exclusive competence of the EU. All EU Member States are required to operate customs procedures in accordance with EU legislation (the key legislation being the Union Customs Code). The UK decides which government department or agency is responsible for implementing and enforcing customs law in the UK, with customs functions in the UK currently being performed by HM Revenue and Customs and Border Force.
Under existing EU legislation, there are a number of duty relief schemes (e.g. inward processing, customs warehousing, temporary admission etc) that are available for companies importing goods into the UK and which reduce or eliminate the requirement to pay customs duties. Post Brexit, when the Government is considering the requirement for independent UK tax legislation, similar or new schemes may be implemented so that UK companies can remain competitive.
The requirement of the EU Customs Union to have a common external tariff, i.e. the tariffs/duties that apply to the import and export of goods from and to third countries, prevents members of the customs union from entering into separate free trade agreements (FTAs) with third countries.
Impact of Brexit
Once the UK leaves the EU, and if the UK does leave the EU Customs Union in line with current Government policy, a movement of goods between the UK and the rest of the EU will become an import/export, with increased compliance obligations and potentially tariffs, i.e. customs duties, being payable. In addition, the UK will no longer benefit from the EU’s current FTAs with third countries, including Korea, Mexico and Chile. This may mean that UK exporters face higher tariffs and other trade barriers in these markets.
The Government has indicated that it will be seeking to agree an FTA with the EU and may be able to successfully negotiate an agreement resulting in no or very low levels of customs duties. In addition to preferential tariff rates, agreement will also need to be reached on issues such as non-tariff barriers including health, safety and environment standards, and rules of origin requirements. The International Trade Committee notes that a UK-EU FTA should seek to retain the mutual recognition of rules and standards, and conformity assessments, that the UK currently has as an EU member. The committee further states that even if this is not possible, a UK-EU FTA should allow for equivalence of assessment (including mutual recognition of assessment), in order to minimise as far as possible the friction to trade caused by any regulatory barriers to trade in goods.
In the absence of an agreed FTA between the UK and the EU, World Trade Organisation (WTO) tariffs will apply to imports and exports between the UK and the EU.
It is currently unclear how far it will be possible for the UK to negotiate post-Brexit “grandfathering” arrangements in respect of existing EU-third country FTAs i.e. whether the UK can continue to benefit from the terms of these agreements, including agreed tariff rates. The International Trade Committee has recommended that the Government must "seek the earliest possible clarity" as to whether such “grandfathering” is legally possible.
Subject to the nature and terms of an FTA that the UK is able to negotiate with the EU and what arrangement is reached regarding the UK's ability to continue to benefit via grandfathering from existing FTAs agreed between the EU and third countries, companies operating in the UK could see:
- Customs dut(ies) and import VAT being payable for imports into the UK from the EU and vice versa, along with the administrative burden of filing import and export declarations etc.
- Customs dut(ies) being payable for imports into the UK from countries with which the EU has FTAs and vice versa (import VAT is already payable and import/export declarations already need to be filed for such movements)
The International Trade Committee has noted in its report that the Government must be "much clearer" about the defining characteristics of the proposed “customs arrangement” and explain how it would differ from a customs union. The Committee has stated that the Government should also clarify if there will be a significant sectoral aspect to the arrangement they are seeking and whether that would impact on future international trade policy.
In conclusion, the future customs landscape from both a legal and practical perspective is still to be negotiated and agreed, leaving uncertainty and the need for scenario and risk planning for companies operating in the UK.
UK based companies and international companies with operations in the UK and other EU member states will need to consider whether their current structures are viable if, for example, they are dependent on trade between the UK and the rest of Europe.
Particular points to consider include:
- When considering your supply chain, what are your options and comparable costs from an import perspective of using EU or non-EU suppliers?
- From a contractual perspective what flexibility does your business have to negotiate and amend the costs of materials from your suppliers?
- With regards to your existing relationships with your customers, can your prices be increased to reflect any additional duty costs? Do you want to consider building this option into future contracts?
- Does your company make sales into or import from non-EU countries on the basis of preferential trading agreements between the EU and those countries? Do you have other options if the associated costs increase?
- What are the strategic advantages and disadvantages for your business of moving UK based manufacturing to an EU site to avoid increased customs duties on moving raw materials and finished products in and out of the UK