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UKMPG Response: Customs Bill: Legislating for the UK’s Future Customs, VAT and Excise Regimes

This response to the “Customs Bill: legislating for the UK’s future customs, VAT and excise regimes” is submitted on behalf of the UK Major Ports Group (UKMPG). Some individual members will respond in their own right, given the importance of the issue.

Background on the UKMPG

UKMPG is the trade association representing most of the large commercial ports in the United Kingdom. It has nine members who, between them, own and operate over 40 ports, accounting for 75% of the UK’s seaborne trade. As such, the members of UKMPG and their facilities are a critical foundation for the UK in a number of aspects:

  • Vital for UK trade: With 75% of UK seaborne trade passing through the facilities that they operate UKMPG members are crucial for the success of a confident, global trading nation in a post Brexit environment;
  • A key driver of UK economic growth: UKMPG members facilitate strategic UK supply chains, such as the automotive sector, and are important regional drivers of jobs and wealth for Britain’s hard pressed coastal communities;
  • Setting the standard: Through their expertise and scale UKMPG members provide leadership and critical mass for the development of innovation, skills and industry best practice; and
  • A sustainable sector: UKMPG members make a major contribution to more resource efficient UK and world through, for example, enabling modal shift, supporting renewable energy and driving forward operational and environmental best practice.

UKMPG members are experts at facilitating international trade – both import and export. This trade covers a wide range of goods, from bulk raw materials, food and agricultural products, construction materials, containers and sophisticated finished products such as cars. It includes for some members ‘Roll On – Roll Off’ (“Ro-Ro”) ferry operations. This trade is global, including with the European Union and encompasses a range of different trade relationships. For example, the European Union makes up less than 10% of the cargo in some ports operated by UKMPG members.

Current UKMPG members are Associated British Ports, Belfast Harbour Commissioners, the Bristol Port Company, DP World London Gateway, Forth Ports, Hutchison Ports UK, PD Ports, Peel Ports and the Port of London Authority.

Introductory Comments

UKMPG strongly supports the White Paper’s support for trade

Trade is the lifeblood of the UK. Productive, competitive ports are vital for its success. UKMPG very much welcomes the recognition of the importance of free-flowing trade and supports the broad aims laid out in the White Paper in this regard.

Not all ports are the same…

The UK ports sector is a diverse sector in terms of the size and activity of different ports. Much of the port focused Brexit coverage to date has dwelt on the issues facing ports with a high concentration and high volume of ‘roll on, roll off’ ferry traffic. Whilst there are undoubtedly very real potential problems for ports with these characteristics, that is the not the whole story for the UK’s large ports.

The UK ports industry has long been characterized by both its resilience and adaptability. UKMPG members are confident that they will find a way to operate successfully in the mid to long term in whatever settlement is reached on the relationship between the UK and the EU.

…but all ports face common concerns on the practical conditions necessary to achieve this success

Regardless of their individual activities and characteristics all ports require an efficient and effective customs regime and border processes to facilitate the free flow of people and goods.

Brexit will mean change from the current well-established and generally well-functioning arrangements for trading with the European Union, although the extent of that change remains unclear. It might also be the case that the changes to the arrangements with the European Union have knock on effects (e.g. in terms of the capacity of UK authorities and their systems) for facilitating trade with areas outside of the European Union.

Regardless of political views on Brexit it is essential that the work is urgently undertaken to ensure processes and systems are agreed and put in place both in the UK and in European ports to continue trade on day one of Brexit in as free-flowing a manner as possible. UKMPG members appreciate the fact-finding activity that Government has undertaken. We would urge a greater level of engagement with Government on practical solutions – such as around pre-notification of freight, mentioned in s5.3 of the White paper – and that this stage of engagement ramps up as soon as possible.

Customs are only one element of ensuring free-flowing trade

Customs procedures are only one element of ensuring free flowing trade at the UK’s borders. With the large majority of procedures and checks being linked to non-customs elements, such as food safety and animal health, its vital that these elements are also considered ‘in the round’. UKMPG therefore keenly anticipates the Government bringing forward its proposals on these elements, as set out in paragraph 3.8 of the White Paper, as soon as possible.

Important to capture opportunities

Brexit should bring important trade opportunities as well as practical challenges to the UK. It is important that the UK has the right infrastructure, such as inland transport connections, and regulation in place to allow UKMPG members to maximise their role in capturing these opportunities.

Core principles

The core principles that UKMPG members believe should direct preparations to create the necessary Customs and border arrangements for post Brexit trading are:

  1. Clarity – More detail is required on the options the UK Government has put forward so that adequate practical preparation (e.g. systems, physical land and facilities) can be made in what is already a tight timeframe. The need for such clarity extends beyond customs arrangements to other aspects such as requirements for examining or holding goods at the border for matters of public health and safety;
  2. Capacity – A fully functioning customs declaration system with the capacity to handle the necessary volume on day one is fundamental. Before day one, scaling capacity to process approvals, such as around Temporary Storage, is also vital. Not having such capacity puts at risk the free-flow of both EU and non-EU trade; and
  3. Capability – UKMPG members already successfully facilitate large volumes of trade with non-European Union destinations. It is clearly important that there is an intensive effort to build and extend capability more broadly to cope with new and higher volume requirements – for example in the UK’s exporters (notably SMEs) and in the Local Authority port health teams.

Responses to selected specific questions as set out in the White Paper

6.8 Operational impacts.

If your business is part of an EU supply chain, including on the island of Ireland, how will the preparations for a new standalone customs regime affect your operations? Are you considering any changes to your current way of doing business including sourcing and trade activities?

Ports systems generally interface with customs arrangement via a ‘port community system’ There are five community systems that provide similar services at all significant ports and airports in the UK handling non-EU trade. Port community systems work in close partnership with port and terminal operators, shipping lines, shipping and forwarding agents and hauliers, as well as Customs and other Government agencies, to facilitate the movement and release of non-EU goods through ports.

Although the port does not interface directly with CHIEF (currently), it is heavily dependent upon it for the efficient handling of import and export traffic. It is anticipated that this dependency will extend considerably post-Brexit as all trade becomes ‘non-EU’, with the predicted “fivefold” increase in goods that will be subject to new procedures[1]. Whether or not this happens in April 2019 or at some later date will depend on the details of any transitional arrangement that might be agreed.

Therefore, the questions faced by UKMPG members are not about changing their business models and systems. They are about the extension of these models and systems, the clarity and timeframes to do so and the capacity of the systems, like CHIEF and in time the Customs Declaration Service, that they in turn interface with.

The contact that UKMPG and its members have had with HMRC, as well as the public statements of senior HMRC figures, leads us to believe that HMRC fully understands the importance of delivering properly functioning systems on time. However, UKMPG members are well aware of the complexities of implementing major new IT projects. Whilst we also note that HMRC is developing contingency options, failure to have a fully functioning Customs system operational by April 2019 risks compromising the ability of not only HMRC but other statutory border control agencies to perform their duties, affecting both EU and non-EU trade and potentially seriously impacting ports.

In both this respect and in terms of the broader sweep of significant system and process changes that would be needed at ports handling predominantly EU trade UKMPG welcomes the White Paper’s inclusion of an “interim implementation period”. We believe such a transitional period is essential. Such a period should be meaningful in the sense of providing for effective change rather than be bound by arbitrary time limits. Clearly any transition or implementation period is not an end itself and requires a settled state to transition towards.

How long will your business need to prepare for the two broad approaches to a future customs relationship, as set out in this paper and the Future Partnership Paper and the contingency scenario?

UKMPG recognizes that the eventual future customs relationship with the EU will be the result of a complex negotiation influenced by a range of considerations. Therefore, rather than tailor our feedback closely to either scenario we set out below the key principles under which new customs arrangements with the EU should operate. These include, inter alia, that the arrangements should be:

  • Concluded as soon as possible in order that the industry has the maximum amount of time available to consider and prepare for the implementation.
  • In practical terms, there is now little time for procuring, commissioning and implementing new systems and facilities. A transitional period is important to increase the likelihood of these facilities being ready in time and the necessary approvals (such as for Temporary Storage status) being processed granted. We note that the success of timely implementation will be rely on action by a range of different Government agencies (e.g. HMRC) and local authorities.
  • Simple in principle and transparent in application.
  • Introduced, as far as possible, in a phased manner in order that we best mitigate the issues arising from a precipitate transition.
  • Designed to ensure that the principle of frictionless borders is a truly workable proposition, as far as possible, in practice.
  • Based upon the existing IT solutions – both in development but also with a robust contingency based on the in-place system – for the enactment of customs processes.
  • Harmonised where possible and practical with the existing processes enacted for current non-EU goods where such harmonization simplifies and streamlines operations.

UKMPG welcomes the principle of HMRC’s ‘One Government at the Border’ project to coordinate the activities of the various agencies involved in border control. We also welcome the various cross-departmental groups being put in place to reduce the risk of fractures between Departments and Agencies. However, there are a plethora of agencies and systems involved at the UK’s borders which adds a further layer of complexity and risk post-Brexit if all these agencies are also required to police EU trade. We would also note that there is currently low visibility of how the coordination projects and structures are progressing.

UKMPG welcomes the development of existing mechanisms for streamlining processes, such as Approved Economic Operator (“AEO”) status, which a number of members are applying for. We would note however that the application for AEO status itself can be time and resource intensive which may have implications for large scale adoption.

One area where UKMPG members have a specific concern about the need for preparation is around the requirements under the Uniform Customs Code for the operation of Temporary Storage areas and the associated financial guarantees. This is discussed at greater length in the response to 6.12 below. But in summary, greater clarity is required urgently and, potentially, agency resources increased.

6.9 Fiscal border process.

If your business already trades outside the EU, what examples of best practice should the UK consider when designing its own border processes to achieve trade that is as frictionless as possible?

UKMPG members already facilitate trade highly successfully outside the EU. In some UK ports such trade makes up the large majority of activity. UKMPG would propose that current inspection rates, i.e. low single figure percentages, and regimes are set as the upper boundary of future procedures and that opportunities for setting lower levels are developed. For example, through a transition period, and potentially longer if standards move in lock step, there should be a lower level of reciprocal inspection frequency on EU / UK goods given the strong starting basis we work from.

UKMPG members who operate facilities elsewhere in the world note that HMRC has generally a more progressive approach to facilitating trade than most customs authorities’ members deal with elsewhere. To this extent members are not surprised that the UK ranks 5th out of 160 countries in the World Bank’s ranking of the efficiency of the border clearance process, including customs. UKMPG strongly believes that such an approach to facilitating trade should be maintained. Maintaining or even improving the World Bank ranking should be a useful KPI for judging the effectiveness of post Brexit systems and processes.

How can the government employ technology to best effect to ensure traffic and trade flows smoothly?

As commercially focused organisations operating in a highly competitive sector UKMPG members welcome innovation that improves efficiency and productivity, so border technology development is encouraged. However, we would note that the focus must be on a functioning border system at day one. Given tight timelines the priority should be on delivering the systems and technologies already in the pipeline. The principle objective should be the delivery of the new Customs Declaration Process and the necessary robust contingency arrangements for continuation of CHIEF if necessary.

We understand that HMRC is considering planning to separate the collection of duties from border control, i.e. that it will not be necessary to ensure duty is payed before goods are cleared to enter the country. UKMPG believes that this is a very important approach to reducing queues in ports post-Brexit with a greatly increased number of consignments potentially being dutiable and much shorter transit times in which to make payment. The need for such an arrangement will be that much greater if the system of collecting duty is not fully functioning on day one. We would welcome confirmation that this separation approach is need intended.

6.11 Costs. 

Do you anticipate additional costs for your businesses in adapting to the changes in this paper? How could those costs be reduced?

Given the lack of clarity on the details of the future customs relationship with the EU it is difficult to make a meaningful judgement on costs. Potential exposure to additional costs will also differ by location dependent on levels of EU trade handled, capacity of existing systems and physical infrastructure. Nevertheless, it is likely that for at least some port operators a requirement to provide additional facilities to handle customs and port health clearance and in order to manage temporary storage requirements will incur additional costs. There are likely to be additional costs as advice on new arrangements solutions implementation is sought.

Such costs could clearly be reduced by seeking to limit the scope of changes made to existing arrangements. Costs at ports that currently handle all or predominantly EU traffic could be significant, but they could be reduced if duty collections and border control are separated and a light touch examination policy is agreed for non-tax controls. Finally, the general good practice of project delivery – have sufficient clarity and time to plan, order, commission and work up – also clearly would reduce costs.

6.12 Need for further information.

What information would be helpful from government as you prepare for changes? When would you need this information?

As noted above Customs procedures are only one element of ensuring free flowing trade at the UK’s borders. With the large majority of procedures and checks being linked to non-customs requirements, such as food safety and animal health, its vital that these elements are also considered ‘in the round’. UKMPG therefore keenly anticipates the Government bringing forward its proposals on these elements, as set out in paragraph 3.8, as soon as possible. Further details on these additional elements is essential not just in terms of developing systems and procedures but also physical infrastructure, such as additional inspection areas, which can have significant implications for costs and delivery timelines.

UKMPG notes the White Paper’s clarification in 4.1 that “the customs legislation will mostly be based on the Union Customs Code” (“UCC”, our emphasis added). Whilst continuity is generally welcomed, aspects of the current application of the UCC and legacy provisions of the previous Community Customs Code are problematic in the context of Brexit preparation and risk significant disruption and financial penalties for ports and third parties operating in ports.

A particularly concerning aspect is securing the necessary Temporary Storage (“TS”) approvals for operators on port sites and the financial guarantees associated with these approvals. A large number of port operators’ current TS approvals remain under the previous Community Customs Code which is not consistent with UCC. Therefore, there is the prospect of a significant requirement for new TS approvals – not just for ports, but also for the far greater number of third parties operating facilities on port sites. We have concerns about the capacity of the National Frontiers Approval Unit (“NAFU”) to process such a volume of approvals, which would certainly run into the many hundreds, in time for Brexit day one without a significant increase in NAFU resources. We also have concerns about the adverse cash flow implications of the financial guarantees aspect.

UKMPG members therefore seek confirmation as soon as possible, including on behalf of third parties operating on their ports, on whether or not the UCC requirement regarding Temporary Storage and the associated financial guarantees will apply to the UK during any transitional period, pending the application of new customs arrangements with the EU post Brexit, or if – our preference, current CCC based arrangements would continue to apply through the transition. If these aspects of the UCC are applied it means that ports, with third parties currently managing Temporary Storage on their sites and their behalf, may need to make alternative and rapid arrangements. UKMPG members also seek assurance on an increase in resources for the NAFU to process the significant increase in applications that are inevitable.

Notes:

[1] HMRC letter to Treasury Select Committee, March 2017

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