On 15 August 2017, the UK Government published a paper setting out its plans for a post-Brexit Customs relationship with the EU (the “Paper“). The Paper is notable in that it challenges the sequencing of Brexit; proposes a temporary interim Customs Union with the EU; and proposes two post-Brexit options for the UK’s Customs Relationship with the EU: a highly streamlined Customs arrangements; or a new, unprecedented Customs partnership with the EU.

We note that the suggestions in the Paper cannot simply be “unilateral” decisions for the UK to take; the vast majority of the points will need to be negotiated and agreed with the EU. Given the immediate reactions from key EU figures to the Paper and the complex politics and emotion involved, how this will be agreed in practice remains unclear.

We also note that the Paper and its suggested interim period and customs models only focus on trade in goods and do not tackle the issue of trade in services, including financial services. The Government still needs to set out how UK businesses will be able to continue to sell cross border services to the EU, and vice versa, once Brexit happens, and whether they envisage an interim period for trade in services.

1. Challenge to Sequencing

The UK’s proposals appear go against the EU’s stance that “substantial progress” must be made on the “Exit Agreement” before talks on the future trading relationship can begin. The EU Commission’s chief negotiator, Michel Barnier, confirmed on 15 August via Twitter that the Customs relationship and any other trade relationship would only be discussed once the UK had settled matters on the exit bill, the matter of Northern Ireland, and citizens’ rights.

2. Transitional Customs Union

The Paper sets out the UK’s proposals for a transitional period during which the UK would enter into a time-limited Customs Union with the EU. The Paper proposes that the UK would be able to begin negotiating its own trade agreements with third countries during this interim period, but that it “would not bring into effect any new arrangements with third countries which were not consistent with the interim agreement“.

It is worth noting that a Customs Union does not necessarily mean that no Customs controls or Customs declarations would be in place, and so the idea of a time-limited Customs Union with the EU may only go part of the way to alleviating extra costs that businesses would face when the UK leaves the Single Market.

However, overall this aim should be welcomed, as both businesses and the UK and EU authorities will undoubtedly require time to prepare for and implement new solutions and processes. As noted above, as most of the points in the Paper, an interim agreement would require agreement from the EU.

3. Future Customs Relationship

The Paper also proposes two options for the UK’s future Customs relationship with the EU: a Streamlined Customs Arrangement, or a Customs Partnership based on an alignment of UK and EU approaches and tariffs for goods whose ultimate end-use will be in the EU.

  • Customs Arrangement

The Customs Arrangement would involve the UK and the EU trading as third parties, but would have the advantage of streamlining processes and minimalising disruption at the ports and airports. However, the Customs Arrangement would not entirely alleviate the administrative burden for companies and would undoubtedly result in more paperwork and barriers to trade than the current position.

One of the solutions proposed by the UK Government is “self-assessment”, a scheme under which an authorised person can take responsibility for and perform certain formalities or controls normally undertaken by Customs authorities, such as determining the amount of duty payable and monitoring their own Customs activities. We note that it is unlikely that companies would be authorised to use self-assessment without first being approved for AEO-C (an internationally recognised quality mark indicating that a trader’s role in the international supply chain is secure and that its Customs controls and procedures are efficient and compliant). Applying for AEO-C involves a burdensome application process for the company.

  • Customs Partnership

The Customs Partnership would go some way to closing the gap that would exist under an EU-UK Free Trade Agreement (“FTA“), and would allow for non-originating goods to be imported into the EU without paying duty twice where UK is a merely a ‘stepping stone’ to the EU. Under the Customs Partnership, the UK proposes to operate a regime for imports that aligns precisely with the EU’s external Customs border (including setting the same duty rates) for goods that will be ultimately consumed in the EU market. The UK proposes to apply the same tariffs and same rules of origin for these goods that are imported into the UK but which are destined for the EU, but could apply a different tariff and rule of origin for goods which will remain in the UK. The Paper suggests that the importer may pay the higher of the UK’s or the EU’s tariff, and depending on which country the goods end up in, could reclaim the excess duty paid in the event that they have overpaid.

Whilst we appreciate that, by mirroring the EU’s Customs approach at the UK border, the UK could effectively remove the need for a Customs border between the UK and the EU for these goods, we note that there are several issues with this proposed model that require solutions.

Firstly and, perhaps of most significance to businesses, this approach could result in significant cash flow issues for businesses if they are required to overpay and reclaim duty. In addition, the parties would need to establish how long the goods could remain in the UK or the EU before any rebate could be claimed. Secondly, this model would also require a robust tracking and enforcement mechanism to confirm whether goods are ultimately exported to the country initially stated. This may prove challenging if there are multiple parties to the supply chain. Thirdly, if the EU’s Customs policies would need to be enforced at the UK border, it is likely that the EU (under the guise of the ECJ) would need to have jurisdiction over the UK border for goods which are destined for the EU (and presumably, vice versa and the UK courts would need to have ultimate jurisdiction over the EU border). This is unlikely to be politically palatable for either the EU or the UK. Finally, this would appear to only provide a solution for products that “flow through” from the UK to the EU and does not provide a solution for products which are imported into the UK and used in manufacturing operations in the UK before being exported to the EU. Even if the UK and EU were to enter into an FTA, such products may not benefit from duty free access on import into the EU as they may not meet the requirements of the “rules of origin” in order to qualify for preferential treatment.

Ultimately, while the premise of the Customs Partnership is innovative and goes some way to filing the gap that would be created by swapping the Single Market for an EU-UK FTA, there are numerous issues surrounding the Customs Partnership that still need to be addressed, not least of which is that this will require agreement from the EU.

We also note that there are already a number of duty relief procedures available that look at avoiding the duty implications of goods flowing through the UK to the EU (such as Transit, Customs Warehousing and Temporary Admission Relief) or the need to pay duty on materials imported into the UK for further processing before re-export (such as Inward Processing), and we would encourage the UK Government to consider in the first instance how they might simplify and relax the rules attached to using such duty reliefs. Unlike the majority of the points raised in the Paper, this could be done unilaterally by the UK and so would be an easier goal to achieve than a Customs Partnership which would require EU approval.