Today’s speech by Theresa May held few surprises having been trailed for a few days now to test the reaction of the markets, the public and the business community to the expected announcement that the UK will leave the Single Market and the Customs Union on exiting the EU to enable the UK to control access to the UK by citizens of the EU.
This option (described as a “Hard Brexit” by commentators in the press) is viewed as the extreme version of Brexit for those who have grown up with membership of the EU and all it represents in terms of freedom of movement of goods and services etc. However, it must be accepted that, on any reading of the various treaties pertaining to Membership of the EU, the continued membership of the Single Market and The Customs Union is totally incompatible with any attempt by a Member State to limit (saving in exceptional circumstances such as National Security) the free movement of people as envisaged under those Treaties.
Theresa May’s speech represents the first specific, clear indication of the Government’s intentions in its future negotiations with the EU that withdrawal from the Single Market and the Customs Union (or most of it) is an acceptable alternative to continued unfettered access to the UK by other EU nationals.
Her speech was quite clear, though, that the UK would seek as comprehensive a free trade agreement as possible. By ruling out remaining in the Single Market, with its ability for businesses to move goods around Europe without checks at national borders, the UK Government recognises that its insistence on controls on immigration will preclude any arrangements incorporating the current status quo. Further, the Prime Minister’s indication that there will be no application to stay fully in the EU’s customs union, probably via the European Economic Area (EEA) is informed by the realisation that such membership would preclude the UK striking trade deals with the rest of the world on its own terms. The possibility has been raised of some sectors, the automotive sector for example, having mutual access allowed via the customs union.
There are indications, though, that the UK Government would agree transitional arrangements for UK/EU trade once Article 50 discussions have been completed (or, more likely, run out of time). Failing final agreement, or only being offered a poor trading arrangement by the EU, the Prime Minister made very clear that there could be a significant re-alignment of the UK’s economic model, most likely targeted at attracting inward investment by reducing business taxation and regulation. Little further detail has been announced (except perhaps for the announcement that Parliament would be voting on the terms of any trade negotiations finally reached).
What, then, are the likely implications for businesses that trade directly with the EU?
There are two main scenarios that might play out over the coming years:
- In the event that a free trade agreement (FTA) can be reached, it can be assumed that tariffs on most, if not all goods, will not apply to EU/UK trade flows. Similarly, few quotas or import licences will be likely to be required.
- In the absence of an FTA, the parties become third parties for each other’s trade. This involves the full range of customs controls and application of tariffs, licensing requirements and the imposition of quotas. For many sectors, tariffs are relatively low (an average of between 3-5%) and are unlikely to be raised to punitive levels, even if that were legally possible under World Trade Organisation (WTO) rules.
iTax UK does not believe that the UK exiting the Single Market and Customs Union would, metaphorically speaking, cause either the UK or the EU to choose to revert to a square wheel as opposed to the round one which the parties had spent decades developing together. Nevertheless, in both scenarios, businesses trading with the EU will have to develop procedures for dealing with the new status of third party importers.
- The internationally agreed rules of origin will become increasingly important to prove where goods legally originate for trade purposes.
- Tariff classification for UK/EU trading purposes will become more relevant than hitherto.
- If tariffs apply, arrangements will need to be made for duty payments (often by means of duty deferment accounts).
- In addition, in both principal scenarios outlined above, there will be reporting requirements based on the preparation of customs entries for submission to the various customs authorities. This will require the development/enhancement of business records; non-EU trading companies will already be familiar with these requirements, but they will be new to many EU-only traders.
There have been some claims that leaving the Single Market/Customs Union will entail hours-long queues at Dover as each box and lorry is opened by the customs authorities. Our view is that, to put it politely, such comments are based on long out of date information. For decades now, as a central player in the development of EU customs practices, the UK has been directly involved in developing customs procedures to ensure that the movement of goods from importation to market is seamless and swiftly administered. Whenever such procedures have been simplified for the purposes of business efficacy, the UK has been intimately involved in developing the IT and administrative framework in order to ensure that not only does it works well for the UK, but also for other Member States.
Some of these measures can be summarised thus:
Customs Freight Simplified Procedures (CFSP): these allow businesses to pre-notify customs authorities of the arrival of third country goods and for any control to be implemented at the importers’ premises;
Warehousing approvals: allow goods to be kept under a form of customs control, either physical or based on a business’s records, until required for free circulation;
Inward/outward processing relief: allows goods to be imported/exported for processing without payment of duty or VAT, and the final product to be re—exported to country of destination
Authorised Economic Operator (AEO): this enables a business to have reduced or eliminated customs checks at frontier crossings provided various standards relating to security measures and record keeping are met and prior authorisation is obtained.
It is our view therefore, that, subject to whatever transitional measures may be put in place, UK customs procedures would continue to mirror those of the EU. Importantly, all of the current reliefs and other duty saving measures which the UK was previously able to apply as a member of the EU, would be equally applicable in its “Third Country” status in respect of those EU businesses seeking to trade with the UK. This view, of course, is confined to the question of the transition of the current customs procedures.
The Tariff implications of the UK being outside of the Single Market and the Customs Union is a separate consideration entirely and, at this point we must move away from what is highly likely (in terms of procedures) to speculation as to classification and duty rates, although we will return to this issue as the position becomes clearer. Similarly, arrangements for the provision of services are not covered in this commentary.
