Brexit

A few weeks after the result of the UK referendum on EU membership was known last year, we published our initial thoughts about what changes we might expect to see from a customs and trade compliance perspective. Since the UK triggered article 50 from the Lisbon Agreement on 29 March 2017, it is time to review and update these initial thoughts.

It took longer for the UK to trigger article 50 than initially envisaged by many. Neither the UK nor the EU had ready project plans to turn to, so much of the time that has elapsed since the result of the referendum on 23 June 2016 has been spent constructing these plans and the “project teams” to take them forward. What has become clearer with time is the extraordinary amount of work and resources that it will take to realise Brexit and to establish a new relationship between the UK and the EU. The Brexit negotiations will take two years according to article 50, but the transition is likely to take longer for some areas to give businesses and certain government authorities enough time to plan and prepare for the new arrangements. This is at least Britain’s stated intention to avoid a “cliff-edge” for business or a threat to stability. As this is also of interest to the EU, we would not be surprised to see a phased implementation approach for parts of the Brexit agreement that cannot be implemented safely in practice by the time the negotiations are due to be completed. Let us now return to the areas we deemed relevant last summer.

 

No longer part of the EU Customs Area

In her Brexit speech, Theresa May clearly states that the UK will not seek partial membership of the EU, or adopt a model used by other countries to hold on to pieces of the membership after exit. When it comes to the Customs Union, she is also clear:

“I do not want Britain to be part of the Common Commercial Policy and I do not want us to be bound by the Common External Tariff. These are the elements of the Customs Union that prevent us from striking our own comprehensive trade agreements with other countries. But I do want us to have a customs agreement with the EU.”

She proceeds to clarify:

“Whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends.”

This means the UK will have to launch its own customs legislation, including detailing customs procedures, customs permits, customs codes, customs declarations, customs duty levels and simplifications, and also how they want to interact with trade in connection with submitting declarations (i.e. software). There will also be a requirement to re-establish physical border points between the Republic of Ireland and Northern Ireland, and at the Channel Tunnel and those ports in the UK which today are only set up  for intra-EU flows. In line with our initial assessment to facilitate international trade, it is not an unreasonable assessment that the UK will aim to make this legislation as user friendly as possible.

New free trade agreements necessary

Free trade is clearly in focus for the UK, as is regaining the ability to strike new agreements on their own terms with countries outside of the EU. These agreements are in addition to a new free trade agreement which will have to be reached between the EU and the UK. The existing trade flows between the EU and the UK are significant and important both for the UK and many EU member states, so it will be of interest to come to a good agreement for both parties. However, it normally takes time to negotiate such agreements and this will also be in addition to the Brexit agreement, so this together with the new customs agreement is likely to be part of a transitional plan to allow business and customs authorities both in the EU and UK to adjust to the post-Brexit legislation.

Flows to and from the UK from the EU will be subject to customs declarations

Yes, this is clearly the case, and in addition also subject to other legislation connected to VAT, excise and agriculture. Post Brexit the UK will continue to have a land border with the EU between Northern Ireland and the Republic of Ireland. There has been a Common Travel Area between the UK and the Republic of Ireland since before they were members of the EU, so some sort of continuation of that will be a feature in the Brexit negotiations. The EU has experience of this type of situation in the border solution between Sweden and Norway, so it is not unreasonable to use that as inspiration for this new situation.

AEO Safety – a question mark

In our original article we pointed out that being outside the EU’s Safety Area for AEO would mean far more complexity and risk of delays for all types of transport to and from the UK from the EU. Here the UK is positive towards continued strong cooperation with the EU in the fight against crime and terrorism. It is likely that the parties will come to some pragmatic solutions. An AEO programme is also highly likely as this is the emerging trend we see in countries outside the EU. However, the UK would have to add negotiating bilateral “mutual recognition agreements” with prioritised countries to its list of post-Brexit activities.

Good customs knowledge will help with the necessary transitions

A good understanding of customs across a business will help to follow and analyse developments during the negotiations in order to prepare well for the post-Brexit situation. How will businesses in the EU secure good distribution to its UK customers and vice versa? How will that in turn affect legal structures, organisation and the required logistics footprint? Business flows incorporating EU member states and the UK, which also include an element of processing, will post Brexit be subject to customs procedures such as inward or outward processing. Here it will be relevant to consider alternative solutions and evaluate the additional administration costs and duties post Brexit, in addition to production costs and quality to help decide if it is worthwhile to change the production set-up or not. A sound business customs knowledge, along with the ability to translate that into already prepared alternative scenarios, will be key to success going forward.

 

KGH will continue to monitor developments from a customs and trade compliance perspective.

Catharina Olofsson, Consulting Director
catharina.olofsson@kghcustoms.com

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