7.1 Increased customs controls
The effects of ‘no deal’ are expected to be most tangible at the UK border. At the moment of leaving the EU customs union without a deal, the border between the UK and the EU would become a customs border. This will mean increased customs controls, potentially involving increased costs and delays for business.211
211 In a no-deal scenario EU legislation on imported goods and exported goods will apply as of the withdrawal date. This includes the levying of duties and taxes and the respect of the formalities and controls required by the current EU legal framework; see European Commission, Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019: Implementing the Commission’s Contingency Action Plan, 19 December 2018, p7
212 Port of Dover –written evidence to the Public Accounts Committee, 23 October 2017
213 UK in a changing Europe, Cost of no deal, 20 July 2017
214 For local governments preparations in the event of a no-deal Brexit see Kent County Council, Brexit Preparedness – Kent County Council Update, 13 December 2018
215 Government Guidance, Trading with the EU if there’s no Brexit deal, 23 August 2018. See also other guidance notices on importing and exporting.
The port of Dover processes up to 10,000 incoming and outgoing freight vehicles a day. Currently, 99% of those originate in the EU and are processed in around two minutes. Customs checks on non-EU trucks take on average 20 minutes. An additional two-minute delay per freight vehicle in the ferry terminal would cause a 17-mile queue at Dover. The ports lack the physical space to accommodate the goods waiting to be processed. This written Evidence from the Port of Dover to the Commons Public Accounts Committee illustrates the urgent need for contingency measures for no deal.212 Also, manufacturers who make use of complex cross-border supply chains and “just-in-time” delivery of parts might be forced to make adjustments.213
Disruption to trade because of uncertainty around customs procedures in the case of no deal is possible. But having contingency plans ready is essential on both the UK and the EU side of the border.214 These concern investment in infrastructure, IT systems and manpower.
The NAO states in its report on UK Border preparedness that the precise impact of leaving without a deal would depend on whether the UK and EU could reach any agreements on issues such as travel, data-sharing and customs arrangements before March 2019.
Official no-deal guidance
HMRC has published a Partnership pack for businesses to prepare them for changes at the UK border after a ‘no deal’ EU exit covering aspects as changes to customs procedures for imports and exports, VAT, excise and regulatory changes. The Government’s no deal guidance to businesses that trade with the EU states that HMRC approach will be to “minimise delays and additional burdens for legitimate trade”.215
Under a Transitional Simplified Procedure, available for at least one year, HMRC will allow imports from the EU through border crossing points,without additional checks. More than 145,000 UK businesses trading with the EU are invited to register for this procedure, which will remove the need to submit customs declarations and pay customs duties at the border but will allow companies to defer the full declaration till after the goods have entered the UK.
UK exports to the EU will be impacted by procedures on the EU side of the border. As part of its broad contingency planning, the Commission has asked Member States to take all necessary steps to be able to apply the Union Customs Code and VAT legislation to UK imports and exports, meaning that the UK will be treated as a non-member state with respect to customs controls. In order to mitigate disruption of goods transport, the Commission has proposed that UK road haulage operators are temporarily (till 31 December 2019) allowed to carry goods into the Union, provided the UK reciprocates.216
216 European Commission, Brexit: European Commission implements “no-deal” Contingency Action Plan in specific sectors, 19 December 2018
217 Explanatory Notes, Taxation (Cross Border Trade) Bill, 20 November 2017, para 9 et seq.
218 National Audit Office, The UK border. Issues and challenges for government’s management of the border in light of the UK’s planned departure from the European Union, 20 October 2017, HC513
7.2 The Taxation (Cross-Border Trade) Act 2018
The Taxation (Cross-Border Trade) Act 2018 provides for a range of negotiation outcomes, including a contingency scenario for a no-deal outcome. The Act covers the implementation of customs, VAT and excise regimes, and sets out the steps the Government would take to minimise disruption for businesses and travellers. It also follows that the operational arrangements for future international agreements on trade and provision for customs import and export duties would have a significant operational impact on the work of HMRC.217
7.3 Concerns about management of borders
The main issues and challenges for the management of the border after Brexit were highlighted in a report by the National Audit Office in October 2017, which noted that “the number of decisions that have to be made over whether to permit people and goods to cross the border could increase significantly (potentially 230% and 360% respectively)”.218 he Public Accounts Committee (PAC), which is monitoring HMRC’s operational preparedness for a no deal scenario, expressed concerns at the end of 2017 about the Government’s earlier assessment that risks to border activity would remain unchanged immediately post-Brexit: T
Government departments are assuming that the risks to managing the border will not change immediately when the UK leaves the EU, and that border checks will therefore be the same after March 2019 as they were before.[..]
Particularly in the event of a no-deal scenario, the border could be exposed to risks on day 1 of the UK’s departure. Officials are relying too much on there being a transitional period in order to have the
96 What if there’s no Brexit deal? Leaves the EU without a detail (4 December 2018) explains the costs of the extra administrative burden in more detail.
The Treasury has acknowledged “the practical difficulties to accommodate significant extra controls and checks without affecting the flow of traffic and people”, and said that therefore:
… the Government is taking a pragmatic approach to border controls to ensure the flow of traffic at the border, and to implement controls and checks as they can be accommodated.231
231 HM Treasury, Government response to the Committee of Public Accounts on the Fourth to the Eleventh reports from Session 2017-19, Cm 9575, March 2018, paras 1.2-1.3 and 3.2-3.3
232 National Audit Office, The UK border: preparedness for EU exit, 24 October 2018, HC 1619, p7 et seq.
233 HM Treasury, UK to remain in Common Transit Convention after Brexit, 17 December 2018
The National Audit Office assesses in its report on border preparedness of 24 October 2018 that government departments’ border programmes are at risk of not being ready for ‘day one of no deal’ due to their scale, complex interdependencies and urgency. For example, the progress of several key system projects depends on HMRC’s CDS/ CHIEF systems being ready in time for March 2019. Infrastructure to enable the tracking of goods and physically examining goods cannot be built before March 2019. In addition, businesses do not have enough time to prepare for a ‘no deal’ scenario. Also, the most complex issues relating to the border remain to be resolved. This refers to decisions on customs arrangements in Northern Ireland as well as HMRC having to design and implement a system for smooth operation of RORO ferry ports and Eurotunnel.232
The PAC inquiry on Brexit and the UK Border is ongoing.
Common Transit Convention
To minimise disruption in transit procedures, the UK has successfully negotiated re-joining the Common Transit Convention (CTC) in its own right soon after leaving the EU. This would enable the UK to remain in the EU’s common transit procedures with EFTA Members as well as Macedonia, Serbia and Turkey. The CTC allows exporters to avoid customs checks until goods reach their destination country, so goods travelling to and from the UK and passing through the EU and into third countries would avoid paying EU duties.233
Case study: impact on the automotive sector
Profile of the sector
Automotive production in the UK is a high profile and successful industry typical of many ‘just in time’ manufacturing sectors. It is part of an international supply chain and its manufacturing plants operate a low-stock, high-volume model that requires constant component delivery. The sector has relatively high levels of productivity, high investment and many high-skilled workers.
The sector in the UK is dominated by foreign-owned manufacturers based at large, high value plants mostly in the Midlands and the North East.234
234 Exiting the EU Committee, HM Government Sectoral Brexit Impact Assessments; Automotive sector, December 2017, p2
235 The industry is defined as Standard Industrial Classification code 29.
236 ONS, Business register and employment survey, 2017, via NOMIS database
237 ONS, Quarterly National Accounts Q1 2018, Low Level Aggregates Table, June 2018
238 ONS, Labour productivity Q1 2018, Data: Breakdown of contributions, whole economy and sectors. Data are current price, output per hour, automotive sector = Transport and equipment manufacturing
239 Society of Motor Manufacturers and Technicians (SMMT), Motor industry facts 2018, pp7,9,10
240 Automotive Council, Rise in amount of British parts used in British car production, 20 June 2017
241 Financial Times, Brexit triggers a great car parts race for the UK auto industry, 30 July 2017
• employed 162,000 people, 1% of total employment in Great Britain in 2016;236
• generated economic output (in terms of Gross Value Added) of £16.6 billion, 0.8% of the UK’s economic output in 2017;237
• is 20% more productive than the overall manufacturing industry and 35% more productive than the average for the UK economy;238
• exported vehicles worth £44 billion in 2017; this was 13% of UK goods exports and 54% of vehicle exports were to the EU.239
The sector is highly integrated with complex supply chains involved in the production of almost all the components of motor vehicles. The Automotive Council (a high-level forum composed of industry leaders and Ministers) estimates that “44% of parts used to make UK cars come from UK suppliers”.240 The Financial Times suggests that even this figure may overestimate the proportion of UK-made components:
Of [the] 30,000 components in modern vehicles, each one may contain 30 sub-components and have passed through 15 countries during the course of its production… With many of the parts going into Tier One components coming from overseas, it is therefore highly likely that the true UK make-up of vehicle components is far lower than 44%…241
The importance of supply chains to this industry means that the impact of a no-deal Brexit could be significant. The main possible impacts can be divided into (i) the impact of tariffs, (ii) the impact of non-tariff barriers to trade, and (iii) the changing regulatory regime.
While the UK is in the EU’s customs union, no tariffs are charged on cars and automotive components (or any manufactured goods) that are imported from or exported to the EU. In a no deal scenario, it is assumed that EU-UK trade would be arranged under WTO rules governing trade between trade partners with no FTA.
This would mean the imposition of tariffs on trade in goods between the UK and the EU. UK exports to the EU would face the EU’s tariffs and imports into the UK from the EU would face whatever tariffs the UK decided to impose.242 The average tariffs imposed by the EU on the import of cars is 9.8%, and the average tariff for motor vehicle parts is 3.8%.243
242 The Government has said that it intends to replicate the EU’s tariff structure as far as possible, at least in the short term (HCWS316 Written Statement 5 December 2016).
243 WTO, Tariff Download Facility (WTO Most Favoured Nation average applied tariffs)
244 Business, Energy and Industrial Strategy (BEIS) Select Committee, Impact of Brexit on the automotive sector, Fifth Report of Session 2017–19, February 2018, Section 2.
246 BEIS Committee ibid. Section 3
If tariffs are imposed on car exports to the EU or component imports from the EU, then the cost of manufacturing cars in the UK would increase. Honda, a major car manufacturer with plants in the UK, commented to the Business, Energy and Industrial Strategy (BEIS) Select Committee that the imposition of tariffs “would make UK manufactured vehicles ‘uncompetitive’”.244 The BEIS Select Committee concluded that:
…it is difficult to see how it would make economic sense for multinational volume manufacturers – the bulk of the UK automotive sector – to base production in the UK in a no deal or WTO tariff scenario.245
Section 6.2 above provides further information on tariff issues in a no-deal scenario.
Non-tariff barriers are practical, administrative or physical obstacles that make trade more difficult. The automotive sector in the UK could experience non-tariff barriers in the form of “delays at the new UK-EU border and…additional administrative requirements” in the event of a no deal Brexit.246
The ‘just in time’ model that the automotive industry operates means that stock is delivered to the assembly line as it is needed. Only a very limited number of spare parts are stockpiled – manufacturers tend not keep more parts than are needed for the immediate future. Delays in the delivery of stock could prevent cars from being manufactured at the pace required to maximise efficiency and retain competitiveness.
Honda commented to the BEIS Select Committee that “a 15-minute delay could add around £850,000 per year in costs” to annual production at their Swindon factory.247
Differing regulations that determine how a manufactured good is produced or tested are a type of non-tariff barrier. All cars sold or registered in the EU are subject to strict safety and other regulations. New cars must be issued with a Certificate of Conformity to prove that they meet EU regulations. Certificates of Conformity can only be provided by a ‘type-approval