Max Fac or Partnership: what does the Brexit debate about customs mean for business?

Media reporting on Brexit has been dominated in recent weeks by discussion of customs options. The cabinet has been looking at two different proposals for future customs arrangements with the EU. Last week, the head of HMRC confirmed their estimates of the cost to business of the two options, indicating the total annual cost to business of the ‘Maximum facilitation’ option is £20 billion a year whilst the ‘Customs Partnership model’ would cost business a maximum of £3.4 billion a year. This week Parliament votes on whether Ministers should seek to continue to participate in a customs union with the EU (which would remove the need for either option).

What are Max Fac and Customs Partnership?

For full definitions, read the government's statement.

In brief, Maximum Facilitation (‘Max Fac’) aims to create as frictionless a customs border as possible using new technologies and existing schemes, rather than to remove it altogether.

A customs partnership would involve the UK acting on the EU's behalf when imports arrive from the rest of the world and would involve entirely new systems and processes.

Do the different models create different costs depending upon the nature of your business? 

Max Fac creates additional costs for all businesses that have EU-UK trade. The Customs Partnership creates extra costs for those businesses with imports only destined for the UK and where there is a difference between the UK and EU external tariff.

Do the HMRC figures match our own analysis? 

HMRC uses an average figure of £32.50 per customs declaration. We have developed our own tool for modelling the indirect tax cost and customs cost for our clients of different Brexit outcomes. Based on a sample of our clients’ costs, we have used an average of £35 per customs declaration plus an additional £45 for those products that require proof of origin – close to HMRC’s figures for the Max Fac.

Does this cover all the costs?

Both the Max Fac and customs partnership models have additional indirect tax costs to businesses compared to the current customs union.

Under Max Fac, if a Certificate of Origin is required there would be a cost to not only obtain the certificate (around £40), but also an administrative burden to prove the origin of the goods. For some businesses, there may also be direct or indirect costs of the introduction of new processes and computerised systems.

Under the customs partnership model, there would have to be an investment by businesses to develop and implement new processes and procedures. There would be additional administrative costs associated with tracking goods throughout the supply chain, along with proposed potential reclaim process. If there is a divergence between the UK and EU and the higher rate of duty is charged pending a reclaim if due, this will reduce cash flow.

How can a business work out costs of different scenarios?

The cost scenarios are difficult to calculate for the customs partnership. It will vary depending on a number of factors including the complexity of the supply chain, the current processes, level of understanding of customs processes and where in the organisation the responsibly lies. The complexity of the required tracking of goods throughout the supply chain and the potential duty reclaim process will also impact costs.

Our Brexit Indirect Tax Impact Analysis (BITIA) data analytics platform is able calculate the potential costs of a number of potential outcomes to the Brexit negotiations, including a hard Brexit. Built into the tool is an estimate for additional costs for customs declarations (at an estimate of £35) which is in line with the anticipated cost used by HMRC. Utilising BITIA will provide insights to businesses of the potential increase to their costs post-Brexit.

What else can a business do now to prepare for customs changes?

Regardless of the eventual outcome of the Brexit negotiations, there are number of ‘no regrets’ steps businesses can build into their Brexit contingency plans. These include:

• Reviewing current customs processes, to ensure that they are up to date and in line with current business requirements including rules or origin, customs valuation rules and tariff classifications
• Obtain binding tariff rulings, as well as binding origin rulings if relevant, for goods traded to provide certainty of the information being declared to customs.
• Utilising customs reliefs that are beneficial
• Apply for AEO status, which will not only reduce customs delays, but will provide comfort that HMRC have audited your customs processes and approved them. In a Max Fac scenario, where mutual recognition of AEO is obtained, business obtaining AEO approval now will be able to benefit from mutual recognition without delay.
• If you haven’t had to deal with customs declarations before and need to develop customs management skills in your business, you could use apprenticeship levy funding to train someone as an international freight forwarding specialist¹.

Get in touch with Louise Scholey to discuss the impact of customs models on your business.

References

1. International freight forwarding specialist, Institute for Apprenticeships, 20 April 2018