24 November 2017

A focus on customs arrangements and ports

Practical issues connected to post-Brexit customs checks on goods at ports are becoming a higher priority. The issue has been gaining profile throughout the third quarter of 2017. Key developments include the following:

  • The Chancellor stated publicly in September that ports faced “significant disruption” if delays to trucks entering the UK increased by a matter of minutes. 
  • The House of Commons Home Affairs Committee report (published 16 November 2017), which identified further urgent contingency planning to take place.
  • The issue of the draft customs bill on 20 November 2017.

95% of the goods traded with Great Britain are carried by sea and therefore pass through the UK’s ports. The Home Affairs committee report concluded that "The areas where decisions are needed as a matter of urgency clearly include port and transport infrastructure, where the Government needs drastically to increase its co-ordination with the privately-owned ports sector".

It went on to note that “The current absence of clarity on the UK’s future customs relationship with the EU, and what this will mean in operational terms, is creating huge uncertainty for businesses."

Part of this uncertainty is whether new customs rules will come into effect on exit date (29 March 2019) or will be delayed for a transition period. This depends upon the progress of current negotiations between the UK and EU and is unlikely to be clear before the middle of 2018 at the earliest.

The committee observed that EU officials are reported to envisage a 21 month transition period. The UK government has put forward a policy paper suggesting that one interim measure (perhaps up to two years) would involve the UK adopting the EU's external customs policy to avoid the need for further checks at the borders. These measures could effectively continue similar arrangements to those in place and blunt a ‘cliff edge’ in March 2019.

Nonetheless, the possibility of no transition deal remains real. In any event, a transition of two years may not be sufficient for all infrastructure and administration changes required. Evidence from the UK Trade Facilitation Expert Panel and British Chambers of Commerce suggested at least three years would be required. In such circumstances urgent new customs arrangements would need to be put in place at ports and new administration structures would be required from HMRC, Home Office Border Force, trading businesses and privately owned ports (as well as other transport operators and those involved in infrastructure construction). It would require effective communications between those entities and could cause significant change and pressure on current resources.

Options to manage new customs requirements

A number of practical solutions to relieve pressure on ports and customs infrastructure have been raised. A number of these are provided for in the Taxation (Cross-border Trade) Bill published on 20 November 2017. The Bill recognises that the UK will need its own customs arrangements post-Brexit, and sets out a regime for doing so, which is designed to be flexible enough to deal with the outcome of the Brexit negotiations, whatever they may be (e.g. a transitional deal, a ‘cliff-edge’ Brexit etc.)

From a legislative perspective it would appear that all options are still on the table. Such options will however require practical implementation both in terms of new infrastructure and changed administration. The latter may be possible more quickly than the construction of substantial amounts of new infrastructure.

One recurring option is to adopt the use of “free ports” (free trade zones at ports which are deemed outside the UK customs border so tariffs are only paid on goods which enter the UK from the port not those which are re-despatched).

Currently UK does not control its trade policy so has not been able to create such free ports. Some port companies have indicated that Brexit may consequently amount to an opportunity for the UK’s ports to operate more effectively in a world market. ABP's chief executive has noted that “Ports and maritime represent a major global opportunity for the UK economy; an opportunity for Britain to increase its trade with countries throughout the world.” There has also been commentary from relevant businesses that the opportunity to rethink certain parts of EU ports legislation post-Brexit could be an advantage.

In relation to bottlenecks at ports and border crossings (perhaps particularly in NI) arrangements for “approved warehouses” (or bonded warehouses) have been proposed. This would allow businesses to conduct clearance checks in designated secure locations away from borders.

In addition, traders who are regularly importing or exporting could apply to be Authorised Economic Operators which would allow them to account to HMRC on the basis of established trading practices (“trusted traders”).

The Bill contains provisions which are expressly designed to give effect to all three options (free ports, bonded warehouses and trusted traders) so it would appear that these are more likely to be probable, rather than possible, outcomes at some point in time (depending on the outcome of the Brexit negotiations).

In the future, additional IT solutions may also become available. Suggestions for vehicle recognition, goods scanning/tracking and other solutions have been proposed (in particular in relation to the open Irish border) although remain, in most cases, unproven technology.

Such options may result in significant amelioration of a potential step change in customs activity. They may also avoid potential issues of the localisation of disruption near ports, and on motorways and rail lines approaching ports.

Impact on future customs arrangements

Failure to put in place suitable practical arrangements in time (both in terms of the legal framework and, more importantly, the infrastructure to operate them) could pose a number of challenges for the operation of ports and the administration of import and export in the event that no transition or long term deal is reached.

The head of the Port of Dover in September described the potential for delays in processing goods as an “Armageddon Scenario.” 99% of goods traffic passing through Dover relates to trade with the EU which makes that port (and other southern English ports) particularly exposed to changes in current customs arrangements with the EU. Witnesses for the Home Affairs Committee (in January 2017) made similar points including that if new arrangements were introduced at short notice (for example from a ‘no deal’ Brexit) delays and blockages at ports could amount to a “shock to the system” which risked bringing “supply chains to a halt.”

Time sensitive goods (such as perishable goods and those destined for 'just in time' manufacture) are particularly exposed to new customs checks delaying processing at ports. Agri-food products in particular could be affected if large percentages of food need to be checked by food health agencies at borders. Checks on containers can take 2-4 days with checks to vehicles potentially causing 5 hour delays. When multiplied across the volume of goods passing through the UK’s ports such delays become substantial.

One estimate has suggested that 5-6 hour delays in processing goods passing through Dover could replicate delays encountered during ‘Operation Stack’ in 2015 with disruption on the M20 reaching as far as the M25 on a chronic regular basis. Currently vehicles entering the UK via Dover or the Channel Tunnel which require customs checks (i.e. largely those trading with non-EU nations) are checked at a location off the M20 which has only 82 spaces for lorries. If vehicles trading with the EU also need to be checked, then the volumes will obviously be far in excess of this capacity.

Substantial infrastructure works may be required at or around all existing ports. That would be difficult at many ports where space is limited. The director general of borders at HMRC told the public accounts committee in November: “The assumption is that there, at some point, will be a need for some additional physical infrastructure to enable customs controls. As much as possible we would like it to be inland rather than at the port, particularly where ports are constrained.” The Home Affairs Committee shared the view that additional infrastructure including port, road and rail facilities are likely to be required.

The practical issues are not confined to the UK. Ports in continental Europe and Ireland may also need additional customs check facilities (which in many cases do not yet exist and which the relevant countries may be reluctant to commit funds to build). If so, any delays in processing UK exports through such facilities will effectively delay UK supply chains.

Costs of additional customs checks

The Home Affairs Committee recorded estimates of the costs associated with additional customs checks and clearances on UK importers and exporters. 180,000 traders may be required to make customs declarations for the first time at a cost of £4 – £9 billion per year with some 200 million additional declarations (HMRC's new system, commissioned pre-referendum was designed with a capacity of 150 million a year to deal with current levels of some £50 million such declarations. That system will need to be upgraded for post-Brexit declarations. That may not be feasible before exit day). The cost of additional checks (whether conducted at ports and airports or elsewhere) could be in the region £19 – £26 billion.

In addition Home Affairs Committee is concerned that border staff are not unduly stretched such that security, smuggling and the entry of illegal goods are compromised. It rejected the Home Office’s estimate of 400 new border staff being required as "completely unconvincing." (HMRC's estimated 5,000 new staff). The committee considered the costs of such measures (together with extending HMRC’s ability to deal with customs declarations) as being significantly higher than the existing Brexit contingency funding requested by the Home Office and in fact higher than the total envisaged by the prime minister for the whole of government. The announcement of an additional £3 billion for contingency planning in the budget on 22 November 2017 may go some way to address such concerns but may still be insufficient.

Overall, the committee considered that the government needed "more urgency" to deal with contingency preparation on managing customs for a no-deal scenario. It recommended that “the scale of planning should be substantially increased, and should accelerate if there is no agreement on a transition deal."

Impact risks and opportunities

Arguably, preparation for new customs arrangements have principally progressed on the assumption that some form of transition arrangement will be put in place and/or a future import/export agreement will be reached which allows for similar transit of goods to and from the EU as currently. That remains the most likely outcome of negotiations between the UK and EU during 2018/2019 and in the longer term may allow the UK to reconsider how its ports should operate outside the EU in relation to global trade.

However, there can be no guarantee that a deal will be reached before 29 March 2019 or what the structure of any transition agreement may be (and what customs checks will be required). In that respect, preparations and contingency planning for full customs checks both in the UK and in EU countries trading with the UK, may be required. That could have significant impacts upon new warehousing and transport infrastructure required, the administration of trading and the practicalities of supply chains.

The Home Affairs committee has clearly recommended that UK government take more urgent steps to prepare for this ‘alternative’ outcome of Brexit negotiations. That may involve significantly more investment and change than is currently planned for. It may also involve a closer discussion between the private ports, traders and government.

Key contact

Ian Tucker

Ian Tucker Partner

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