Brexit Business Digest | Major customs, VAT and excise legislation ahead

The UK government yesterday published White Papers on customs and trade after Brexit. This note discusses the customs paper and the major UK legislation it presages. Later this week we’ll look at the trade paper.

Customs, VAT and excise after Brexit

The customs White Paper discusses the forthcoming Customs Bill, legislation that will have to be passed into UK law ahead of Brexit’s expected date of March 2019. We don’t have a draft of the Bill yet; an aim of the White Paper is to engage with stakeholders on the detail of what should be in the Bill.

Here are key points from the White Paper.

The existing customs regime

The UK is a member of the EU Customs Union and will remain so until Brexit. This means that:

• Free movement intra-EU: Goods moving between the UK and other EU Member States are free of customs duty, quotas and processes. (The Single Market means that goods move freely on the basis of common quality and regulatory standards – the Single Market and the Customs Union being different things which combine together to produce a frictionless common market.)
• EU and non-EU: Member States apply the EU’s Common External Tariff (the same rates of customs duty) and its quotas and customs processes to goods moving between the EU and non-EU countries.
• Trade agreements: The EU negotiates trade agreements, including tariffs, on behalf of all Member States.

In terms of the legal framework:

• The UCC: Most of the law governing the Customs Union is contained in the Uniform Customs Code. This is an EU Regulation and so directly effect on the UK. As a result, there is only limited UK domestic legislation on customs (mostly contained in the Customs and Excise Management Act 1979).
• The Directives: EU law provides the framework for VAT and excise rules across the EU. These rules are generally set by Directives, and so need to be implemented by domestic UK legislation (such as the VAT Act 1994).

What does the UK government want to happen?

The UK government’s position is that the UK will leave the Customs Union and the Single Market at Brexit.

The government’s preferred next step after that is for a transitional period, during which there would be a ‘new and time-limited customs union’ between the UK and the EU Customs Union. This would mean that businesses would only need to adjust to a new UK customs regime once, at the end of the transitional period.

That transitional period is currently expected to be ‘around two years’. There would be a shared external tariff and no customs processes and duties between the UK and the EU. After that, the new customs regime would kick in.

None of this has been agreed by, or even (publicly) discussed with, the EU.

What has to happen anyway? A new Customs Bill

When the UK leaves the EU at Brexit, all existing EU law will be incorporated into UK law by the Withdrawal Bill. That EU law will then need to be amended so that it ‘works’ and makes sense after Brexit.

But the amendment powers under the Withdrawal Bill do not allow revenue raising. Given that, and the complexity of customs legislation, and the need to keep all options open as to what the UK’s future customs, VAT and excise regimes look like in the future, the government has decided to introduce a new Customs Bill to apply after Brexit.

What will the Customs Bill contain?

Well, we don’t know. It hasn’t been published. But as the White Paper makes clear, the Bill will allow for all eventualities, including for:

• the government’s desired outcome of a new UK-EU27 customs union during the transitional period, followed by a new UK customs regime; and
• a cliff edge ‘hard Brexit’, where the UK leaves the UK in March 2019 with no deal, transitional or otherwise, falls back on WTO trade rules and needs its own independent customs regime to kick in at 00.01 a.m. on 30 March 2019.

So the Bill will enable the government to create an entirely new and standalone customs, VAT and excise regime that enables the UK to:

• charge customs duty on goods (including from the EU);
• define the classification of goods (nomenclature);
• set and vary rates of customs duty;
• determine ‘the additional territories forming part of a customs union with the UK’ (intriguing!);
• request and store tax-related information from declarants;
• establish a new UK tariff and set out tariff-related provisions; and
• establish a new body to conduct trade remedies investigations.

Some of those provisions will support the introduction of a new UK trade policy.

Continuity for business

The White Paper says that ‘in order to provide continuity for business, the customs legislation will mostly be based on the Union Customs Code. The administration of the VAT and excise regimes will remain largely the same as today’.

What might a future customs relationship with the EU look like?

The government set out its ideas on how the future customs relationship with the EU might work (after any transitional period) in a ‘future partnership paper’ in August 2017.

Is the Bill the whole story?

No. Although the Bill is an essential step in establishing a standalone UK customs regime, crucial logistical work is needed to:

• recruit the personnel to run the new regime;
• build the necessary physical infrastructure, particularly around ports and their approach roads; and
• put in place large-scale IT systems,

that would be needed in the event of a ‘hard’ Brexit, and which may be needed anyway, depending on what deal is agreed with the EU. Although the White Paper has a couple of pages on contingency planning for a hard Brexit, focused on how intense pressure at ro-ro ports could be alleviated, there are few signs that this logistical work has started.

Next steps for the Bill

We don’t have a publication date for the Bill. The White Paper invites comments by 3 November 2017, so conceivably the Bill could see a thin winter sunlight ahead of Christmas 2017.