Plans for ‘frictionless’ VAT and customs regime post-Brexit

The Treasury has published a white paper on plans for the standalone customs, VAT and excise regimes the UK will need once it leaves the EU, and is seeking feedback on the options under consideration, including what it describes as ‘an innovative and untested approach’ mirroring EU arrangements

The Treasury points out that regardless of the outcome of the current negotiations on Brexit, the UK would need new customs legislation in place by March 2019, and will be bringing a customs bill before parliament later this year.

In his foreword to the white paper on the proposals, Chancellor Philip Hammond outlines three strategic objectives in creating a new agreement on customs: ensuring UK-EU trade is as frictionless as possible; avoiding a ‘hard border’ between Ireland and Northern Ireland; and establishing an independent international trade policy.

Hammond references the prime minister’s proposal for an interim implementation period, to allow businesses both in the UK and the EU time to adjust to exit in a smooth and orderly way.

He writes: ‘How long the period is should be determined simply by how long it will take to prepare and implement the new processes and the new systems that will underpin our future partnership, but we are clear that “cliff-edge” changes are in the interests of no-one, either here, or in the EU. That is why the UK will push hard to avoid them, and to ensure that businesses and citizens only have to adjust once to a new customs relationship.’

The customs bill will make provisions relevant to a new UK tariff, including the power to set customs duty, set quotas and preferences, and set out additional tariff-related provisions and how they will be administered. This will include, for example, the tariff applicable to developing countries (unilateral preferences) and in connection with UK trade remedies and disputes post-EU exit.

It does not presuppose any particular outcome from the negotiations with the EU. In response to feedback from stakeholders, and in order to provide continuity for business, the customs legislation will mostly be based on the Union Customs Code. The administration of the VAT and excise regimes will remain largely the same as today.

The bill will allow the VAT and excise systems to continue to function whatever the outcome of the negotiations, by giving the government the flexibility to flexibility to deal with VAT on movements of goods and services between the UK and EU, and to allow HMRC to adapt IT systems, for example the excise movement and control System, for UK internal excise duty suspended movements.

Future models

In the event the EU agrees to the UK’s proposal for an interim implementation period post Brexit, the Treasury says there could be a new and time-limited customs union between the UK and the EU customs union. This would be based on a shared external tariff and without customs processes and duties between the UK and the EU.

The white paper notes: ‘The length of this period needs further consideration and will be linked to the speed at which the implementation of new arrangements could take place.’

Otherwise, the paper suggests two broad approaches to a future customs relationship with the EU. The first of these is a ‘highly streamlined customs arrangement’ between the UK and the EU, which, while introducing customs formalities to UK-EU trade, would seek to minimise these additional requirements as far as possible. This would consist of facilitations that would deliver a range of different benefits.

Under this approach, the government would seek mutual recognition of authorised economic operators (AEOs), enabling faster clearance of AEOs’ goods at the border. There would be bilateral implementation of a technology-based solution for roll-on, roll-off ports which could consist of pre-arrival notification of consignments on a port IT system, linked to customs declarations and vehicle registration numbers so that vehicles were not required to stop at the border, enabling traffic to flow smoothly.

In addition, there would be other simplifications for business, such as self-assessment to allow traders to calculate their own customs duties and aggregate their customs declarations. The Treasury would also tackle the potential for delays by speeding up some authorisation processes, for example through increased automation and better use of data, and in the longer-term streamlining authorisation requirements to reduce complexity, such as in relation to the UK’s existing framework of duty suspensions and reliefs.

Under the highly streamlined customs arrangement, the UK believes it would need to go still further to agree specific facilitations for the Northern Ireland-Ireland land border. This would include a crossborder trade exemption to ensure that smaller traders could continue to move goods with no new requirements in relation to customs processes at the land border. New administrative processes could apply for ‘trusted traders’ on either side of the border, allowing for simplified customs procedures, such as reduced declaration requirements and periodic payment of duty.

The second model under consideration is a ‘new customs partnership’ with the EU, which would support UK-EU trade outside of a customs union arrangement, while still removing the need for customs processes at the border.

One potential approach the UK intends to explore further with the EU would involve the UK acting in partnership with the EU to operate a regime for imports that aligns precisely with the EU’s external customs border, for goods that will be consumed in the EU market, even if they are part of a supply chain in the UK first. The UK would need to apply the same tariffs as the EU, and provide the same treatment for rules of origin for those goods arriving in the UK and destined for the EU.

By mirroring the EU’s customs approach at its external border, the UK could ensure that all goods entering the EU via the UK have paid the correct EU duties. This would remove the need for the UK and the EU to introduce customs processes between them, so that goods moving between the UK and the EU would be treated as they are now for customs purposes. The UK would also be able to apply its own tariffs and trade policy to UK exports and imports from other countries destined for the UK market, in line with the aspiration for an independent trade policy.

The alternative option of a new customs partnership arrangement with the EU would remove the need for the UK and EU to introduce customs processes between them. This would enable the border between Northern Ireland and Ireland to continue to be seamless.

The white paper states: ‘The government recognises that this is an innovative and untested approach that would take time to develop, implement and negotiate with the EU. The government is keen to explore this approach with businesses and other stakeholders to understand the practical complexities involved in making it work, and whether it could achieve the government’s objectives.’

In the event that the UK exits the EU with no deal agreed, the customs bill provides for contingency arrangements allowing the UK to establish a standalone customs regime from day one, including setting tariffs and quotas, and establishing a goods classification system in line with the government’s WTO obligations. The UK would apply the same customs duty to every country with which it does not have a trade deal or otherwise provide preferential access to the UK market, such as schemes for developing countries. The level of this duty would be decided by the government, and set out in secondary legislation before the UK leaves the EU.

Under this scenario, traders that currently trade only with the EU will be subject to customs declarations and customs checks for the first time, and would need to be registered, and the bill allows for the government to facilitate this.

A contingency scenario would also mean changes to how tax is collected on goods sent as small parcels. The Treasury says that due to the EU’s geographical proximity to the UK, allowing parcels valued £15 or less to be sent from the EU without VAT being payable would potentially undermine the UK high street in the same way as low value parcels sent from the Channel Islands did before the rules were changed in 2012.

Applying the current rules for parcels sent from non-EU countries to all parcels would also increase the volume of parcels on which Royal Mail and fast parcel operators have to collect tax, and more UK consumers would have to pay tax when their goods are delivered. Instead, the UK is exploring alternative collection mechanisms, including technology-based solutions, to help collect the taxes due on parcels valued below £135 from the business selling the goods to minimise consumer burdens when the parcel is delivered.

Regardless of which customs arrangements are adopted, the Treasury acknowledges the processes involved will require implementing a technology-based solution to avoid the need to hold vehicles for any length of time at ports to present goods to customs for export. Therefore, presentation would take place inland as much as possible, and at the port there would be a means to confirm that goods have left the UK.

The Treasury says it welcomes written submissions on the white paper. While there is no deadline for providing feedback, responses before 3 November 2017 are encouraged, and should be sent to

Customs Bill: legislating for the UK’s future customs, VAT and excise regimes is here.

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