Chancellor of the Exchequer, Philip Hammond said: ‘The leading document crucially sets out that the UK will be guided by what delivers the greatest economic advantage to the UK, and by three key objectives: to ensure trade with the EU is frictionless as possible, to avoid any form of hard-border between Ireland and Northern Ireland and to establish an independent international trade policy.’

‘Frictionless border’

The paper, produced by the Department for Exiting the European Union (DExEU) outlines two broad approaches.

The first is what it calls ‘a highly streamlined customs arrangement’ between the UK and the EU, with customs requirements that are as frictionless as possible. This would aim to continue some existing arrangements the UK has with the EU, reduce or remove barriers to trade through new arrangements, and adopt technology-based solutions to make it easier for businesses to comply with customs procedures.

DExEU says this approach involves utilising the UK’s existing tried and trusted third country processes for UK-EU trade, building on EU and international precedents, and developing new innovative facilitations to deliver as frictionless a customs border as possible.

The paper references the new customs declaration service (CDS), which is being developed currently to replace the existing HMRC customs system (CHIEF). It states HMRC is on track to deliver by January 2019. CDS will be compliant with the EU’s Union Customs Code to ensure continuity for business and will provide modern, digital customs technology, which will ensure HMRC has the flexibility needed to deal with the outcome of the negotiations with the EU.

The second approach embraces a new customs partnership with the EU by aligning the UK’s approach to the customs border in a way that removes the need for a UK-EU customs border. One potential option would involve the UK mirroring the EU’s requirements for imports from the rest of the world where the final destination is the EU.

The DExEU paper states: ‘This is of course unprecedented as an approach and could be challenging to implement and we will look to explore the principles of this with business and the EU.’

The paper says there would need to be a robust enforcement mechanism that ensured goods which had not complied with the EU’s trade policy stayed in the UK. This could involve, for instance, a tracking mechanism, where imports to the UK were tracked until they reached an end user, or a repayment mechanism, where imports to the UK paid whichever was the higher of the UK’s or the EU’s tariff rates and traders claimed a refund for the difference between the two rates when the goods were sold to an end user in the country charging lower tariffs.

Businesses in supply chains would need to be able to track goods or pass the ability to claim a repayment along their supply chain in order to benefit.

The paper says: ‘The government is keen to explore this approach with businesses and other stakeholders to understand the practical complexities involved in making it work and assess which other approaches could have a similar effect, how they would work in practice and whether they could achieve the government’s objectives.’

The paper also sets out new details on an interim period with the EU. The proposed model, which would mean close association with the EU customs union for a time-limited period, would ensure that UK businesses only have to adjust once to a new customs relationship. This would minimise disruption and offering business a smooth and orderly transition.

The length of the interim period needs further consideration and will be linked to the speed at which the implementation of new arrangements could take place.

Secretary of State for Exiting the EU David Davis said: ‘The approaches we are setting out today will benefit both the EU and UK and avoid a cliff-edge for businesses and individuals on both sides.

‘The way we approach the movement of goods across our border will be a critical building block for our independent trade policy. An interim period would mean businesses only need to adjust once to the new regime and would allow for a smooth and orderly transition.’

The paper says that as the UK leaves the EU, it will again take up an independent seat at the World Trade Organisation (WTO). To minimise disruption, the UK will prepare schedules that replicate as far as possible current obligations.

Contingency planning

Regardless of the outcome of the negotiations, the government will need to legislate for a new customs regime to be in place by March 2019, and make changes to the VAT and excise regimes. The Government will bring forward a customs bill in the autumn.

In addition to providing for negotiated outcomes, the customs bill will give the government the powers necessary to operate standalone customs, VAT and excise systems, as necessary, following Brexit. The paper notes that this is not the government’s preferred outcome to the negotiations, but says ‘it is essential that the UK is prepared for all possible outcomes on customs arrangements’.

In this scenario, without any further facilitations or agreements, the UK would treat trade with the EU as it currently treats trade with non-EU countries. Customs duty and import VAT would be due on EU imports. Traders would need to be registered. Traders exporting to the EU would have to submit an export declaration, and certain goods may require an export licence. The EU would also apply the customs rules and VAT to imports from the UK that it applies to non-EU countries.

The policy paper says the government is actively considering ways in which to mitigate the impacts of such a scenario. Other EU member states will also need to make contingency preparations to mitigate the risk of delays resulting from their own customs processes.

Policy paper Future customs arrangements: a future partnership paper is here.