Category: News

Published yesterday, the papers set out what HM Government wants the future customs relationships with the EU and other countries to look like.
See: https://www.gov.uk/government/publications/preparing-for-our-future-uk-trade-policy/preparing-for-our-future-uk-trade-policy
The papers say what was widely expected to be their position – using current facilitation procedures, origin rules and, most probably, mirroring current EU tariffs. That last will probably cause some consternation, particularly in the agricultural sector, where some tariffs are sky-high. The papers indicate that a goal is for these changes – to the law, to logistics requirements and IT systems – should only happen once. However, the papers also indicate that after a transitional period, there may be some divergence to suit the needs of UK consumers and businesses.
A few headlines:

• UK Government will look to waive the requirements to submit simplified declarations at borders
• Remain a member of the Common Transit Convention (CTC) which simplifies border requirements for goods in transit
• Reduction in pressure and delay by negotiating mutual recognition of Authorised Economic Operators (AEOs), or Trusted Trader, schemes, which allow much greater simplification of border procedures – particularly useful for larger businesses involved in cross-border trade with the EU
• Bilateral implementation of pre-arrival notifications allowing smooth traffic flows from UK ports
• Streamlining processes giving access and authorisations to customs reliefs and duty suspensions

There are several more proposals in the paper, but one idea that is now official policy is that of self assessment. This would allow EU trade (and presumably by extension, international trade) to be accounted for on a periodic basis by the trader, akin to a VAT return process. This idea has been floated for several months and, if adopted, would remove many headaches and costs of formal entry requirements, particularly for regular importers and exporters.
One significant issue is the “no deal scenario” (the contingency scenario). The paper envisages, in that event, a lot of work being required for origin, tariffs, quotas and other arrangements and effectively means developing a WTO compliant “ground up” customs system operative from day one.
There is plenty more in the papers, some of which is aspirational and requires agreement with the EU. This is an important area which international traders, particularly those involved in EU trade, will need to keep a very close eye on in the near future.

Background
AEO status is an internationally recognised quality mark indicating that a business’s status in a cross-border supply chain is secure, and that its customs controls and procedures are efficient and compliant.

The authorisation is aimed at businesses that are established in the EU, actively involved in customs operations and international trade and have an Economic Operator Registration and Identification (EORI) number.  When the UK leaves the EU, it looks increasingly likely that it will become a third country for customs purposes.  Accordingly, the business operations of any EU-trading UK business will have to be reviewed to see if there is any benefit in those EU operations being brought under the AEO scheme.

Similarly, and in the absence of any bespoke scheme, the UK may seek to agree a Mutual Recognition Agreement (“MRA”) with the EU.  This mirrors AEO arrangements in the EU, and there are a number of these MRAs currently in operation (e.g. with USA, Japan and Canada).  When considering any benefits (see below), a business needs to look at its EU operations and how they are structured (so, for example, a company may set up an EU subsidiary to handle all its goods movements from the UK – an AEO in one Member State applies across the EU).  If an MRA is agreed, the reverse may also apply for EU to UK imports.

Although there is no size threshold for approval as an AEO, the status, introduced some years ago, has never had the kind of take-up that other customs facilitation procedures (e.g. Inward Processing Relief or Customs Freight Simplification Procedures “CFSP”) have achieved; it is thought that fewer than 500 businesses in the UK have been granted AEO status.  This is largely because those companies trading mostly with the rest of the EU have not needed to go through the application procedure and record-keeping requirements.  With Brexit looming, and the need to retain the benefit of all possible simplification measures, this is liable to change for many businesses.

Details
There are two types of AEO available; Customs simplification (AEOC) and security and safety (AEOS).

Benefits
Having approved AEO status:

• gives quicker access to certain simplified customs procedures and authorisations and in some cases the right to ‘fast-track’ shipments through some customs and safety and security procedures
• allows for reductions (70%) or waivers of comprehensive guarantees
• allows movement of goods in temporary storage between different member states
• allows for a notification waiver when making an entry in a declarant’s records (EIDR)
• enables centralised clearance (when available)
• allows self-assessment of duty liabilities (where available); and
• can benefit AEOS holders with arrangements under mutual recognition agreements with third countries.

Eligibility
Any business involved in the international movement of goods can hold AEO status, including:

• < >< >freight forwarders
• warehouse keepers
• customs agents
• < >< >others (for example, port operators, secure freight parking operatives, airline loaders)

Requirements
To hold AEOC status, a business needs:

• good tax and customs compliance history (including that of individuals involved with the business)
• good commercial and transport record-keeping standards
• financial solvency
• staff holding relevant professional qualifications or an ability to demonstrate practical standards of competence in the relevant function

AEOS status can apply to any business that fulfils all of the above criteria with the exception of professional qualifications and practical standards of competence. In addition, the business must also have appropriate security and safety standards to protect its international supply chain, including:

• physical integrity and access controls for its goods
• acceptable logistical processes for the goods handled
• personnel and identification of business partners

AEOS status allows:

• a lower risk score – used to determine the frequency of customs physical and documentary checks
• consignments being fast-tracked through customs control
• reduced requirements for the mandatory pre-arrival/pre-departure
• the ability to benefit from reciprocal arrangements and MRAs with third countries, e.g. USA or trading partners that adopt the World Customs Organisation safe framework

This last bullet point, as pointed out earlier, may apply to UK trade, depending on final Brexit arrangements.

More detail can be found in UK Customs Notice 117.  Clearly, this is currently written with the UK as a member of the EU.  On leaving, though, it is most unlikely that this scheme will change substantially for EU operations.  Similarly, it is highly likely that the UK will look to implement corresponding arrangements for trade with the EU and other trading partners.

If you want more detail on how to apply to become an AEO please contact us and we will be happy to assist.

The press is increasingly reporting concerns in industry of the potential for increased “red tape” in relation to movements of goods for customs purposes, if the UK was to be solely governed by WTO Rules if it fails to successfully negotiate a suitable arrangement with the EU on Brexit.

Whilst it is highly likely that, on leaving the EU, the customs procedural simplifications currently in place would remain in some form, perhaps this latest WTO Agreement, the Trade Facilitation Agreement (“TFA”) signed by the UK as a member of the EU, could go some way to calming fears in industry of post-Brexit burgeoning red tape.

The entry into force today (22 February 2017) of the TFA, which, amongst those signatory countries seeks to expedite the movement, release and clearance of goods across borders, confirms again the abiding aim of the WTO for Global trade facilitation reform creating a significant boost for commerce and the multilateral trading system as a whole.

Studies suggest that the TFA is likely to reduce trade costs, it is said by an average of 14.3 per cent, with developing countries having the most to gain. It is also likely to reduce the time needed to import goods by over a day and a half and to export goods by almost two days, representing a reduction of 47 per cent and 91 per cent respectively over the current average.

Implementing the TFA is also expected to help new firms export for the first time and, once the TFA is fully implemented, developing countries are predicted to increase the number of new products exported by as much as 20 per cent, with least developed countries (LDCs) likely to see an increase of up to 35 per cent, according to the WTO study.

The TFA’s 12 articles prescribe many measures to improve transparency and predictability of trading across borders and to create a less discriminatory business environment. The TFA’s provisions include improvements to the availability and publication of information about cross-border procedures and practices, improved appeal rights for traders, reduced fees and formalities connected with the import/export of goods, faster clearance procedures and enhanced conditions for freedom of transit for goods. Of particular note in this regard is Article 7 (1) of the TFA which provides that each Member shall adopt or maintain procedures allowing for the submission of import documentation and other required information, including manifests, in order to begin processing prior to the arrival of goods with a view to expediting the release of goods upon arrival. Additionally, each Member shall, as appropriate, provide for advance lodging of documents in electronic format for pre-arrival processing of such documents. The provision of this pre-arrival information is designed to enable the swift release of goods to market.

Further encouraging provisions exist in Article 7(3) aimed at separating disputes over duties or charges, from the clearance of the goods in that each Member has to adopt or maintain procedures allowing the release of goods prior to the final determination of customs duties and other charges if such a determination is not done prior to, or upon arrival, or as rapidly as possible after arrival and provided that all other regulatory requirements have been met such as the provision of security such as a guarantee.

The TFA will have to be taken into account as part of the transition process to a post-Brexit UK customs regime and, to be fully effective, it will have to be implemented throughout all the Member countries. However, if fully implemented, the TFA can only be a positive feature of the post-Brexit customs landscape.

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.
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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.
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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.