Examination of witnesses
James Hookham and Clive Broadley.
Q1 The Chairman: Good morning, Mr Hookham and Mr Broadley. Welcome to this first evidence session of the Committee’s inquiry into Brexit customs arrangements. It is a public session. A transcript will be sent to you afterwards and if there are corrections that need to be made, please make them and send them to us. The Committee has both your biographies, so I will not go into any detail to explain your work.
You have already seen the questions but, as I always say to witnesses, colleagues may well decide to ask a different question. That is the prerogative of the Committee. If you would like to make opening statements, please feel free to do so.
James Hookham: Thank you very much, Chair. Good morning to Members. I am the Deputy Chief Executive of the Freight Transport Association. We are one of Britain’s biggest trade associations. I remind the Committee that our members represent all parts of the supply chain, not just road freight carriers but, particularly in the context of Brexit and this inquiry, a lot of exporters and importers—the manufacturing industry, retailers and so on—that manufacture goods for export or procure goods for import.
I also remind the Committee that the Freight Transport Association takes no position on the merits of Brexit as such. We did not offer a view during the referendum, nor after the result. However, with the Government’s stated intention of leaving the customs union and the Single Market, we are concerned—and, indeed, vocal—on behalf of our members about the potential impact of that decision on the continuity of supply chains. That is what we are anxious to help the Committee understand and, as best we can, help solve those challenges in order to keep Britain trading—which is our campaign slogan.
Clive Broadley: You have my biography, so I will not repeat that. I am here as a consultant to the FTA. My experience is probably more in the customs-broking, freight-forwarding side of life, although I am also involved with the trading sector. As you can see, I am still active, despite my retirement from full-time work. I specialise in helping companies with the AEO process,[1] other regimes, simplifications, special procedures, customs warehousing, inward processing and things of that sort. That is the skill set that I bring to this. I am very much border-facing in terms of existing practices.
Q2 The Chairman: Thank you. You are both welcome and thank you for taking the time to join us. I will start with the first question. Could you talk us through the current requirements for customs declarations and paperwork for a UK company—you mentioned the automotive sector, which would be a good example to start with—which is trading with non-EU countries, including the necessary licences, registrations, proof of origin and compliance with standards? It would be good to get an overview of that from you.
James Hookham: Before handing this over to Mr Broadley, I recall that we supplied the Committee in advance with two documents—suggestions for how border processes might be altered for trade with the EU—and two diagrams, one for import and one for export, which I hope will make Mr Broadley’s task of explaining a necessarily complex process a little easier.
Clive Broadley: I will give a generalised view. The systems are quite complex and they can vary from commodity to commodity or due to the country from which you are importing or the size of your business. There are all kinds of diverse situations that we encounter. There is no need to pick the automotive sector in particular, because the rules and processes are the same in principle, regardless of the commodity or the sector you are in. If we take a typical import coming from China—let us say they are widgets in a container—a sales contract will be agreed, and within that sales contract there is something called an Incoterm, which determines which party controls the shipping process: who appoints the carrier and when the shipment takes place. But it is the responsibility of the exporter in China or anywhere else to produce the documentation that is required for the importation. It is worth bearing that in mind, because it is not just about talking through the customs process; we need to talk through the process of documentation and paperwork without which you cannot declare your goods to customs and therefore cannot get clearance through the system.
Typically and briefly, the Chinese exporter will, one hopes, notify the UK importer that the goods will be arriving on a particular vessel or aircraft and will give certain key information, including the shipping document number which is unique to the shipment, the name of the vessel or the flight number, and when it is due to hit the border here. The exporter will then require the shipping invoice and any other commercial documents, such as an origin certificate, a packing list or a quality assurance document. Without that documentation, you cannot begin the process of working up the customs entry that is required to go into the system. That can be the source of a delay.
If you have that documentation, you then have to check that it is compliant. You need to know the currency code and you need to work out the commodity code for the goods, because everything is identified by a commodity code. It is the commodity code that determines whether duty, a special VAT rate or any other special requirements such as import licences, are required at that stage. One would hope that the importer will know this, but it is not always the case, because they may be inexperienced.
Assuming that you have that document and you know the currency and the Incoterm, which is required for the build-up of the price, in the customs system you have to enter what is called a CIF price: the cost of the goods, the insurance on those goods and the freight costs—once you have all that information and you are happy with it, you can begin to do the entry. The vast majority of entries are handled by the forwarding sector or customs brokers. Some importers—I will come back to this—will do their own or will do part of that process.
Let us stay with the typical situation, which is that you can now build your entry electronically. You build it on a computer system. You can then electronically post it through to the CHIEF system,[2] which is the current computer system run and managed by customs that receives coded data from the entry that you put in, and you can put that entry into the system up to before an aircraft or ship arrives, but it cannot progress until the ship or the aircraft arrives. The reason for that is that at the last minute a ship may divert to another port and not call at the UK at all, or the aircraft may not fly, et cetera. So, CHIEF receives a message from the port to say that the aircraft or the ship has arrived, and then there is an auto-switch that pushes through the customs entry.
The customs entry is then analysed by CHIEF, which is quite intelligent and will look for profiles and will issue what is called a routing. Route 6 is an immediate clearance, and clearance can happen within minutes; the system produces a clearance notice and notifies the port authority that those goods are clear and can be collected and can go. But it may look at it and say, “They’re claiming preference and therefore we want to see more documentation”, and it will put a temporary hold on it until evidence of those documents is sent to the clearance hub based in Salford, Manchester. So those would be sent through there, and there is intervention at the clearance hub that says, “We have received these documents and we’re happy with them”, and they send the message back to CHIEF. But it may go route 2, which says, “We want to examine these goods”. It could be profiling, suspicion or random, in which case they will say that the shipment must stop until we have sent in the team to check and verify the goods and paperwork, and so on. So there are different routes.
Assuming that you then have clearance one way or another, you can arrange for the transport to go in and collect the goods from the airport or sea port. So, this is not just about how quickly the customs system can process the data—and this is relevant for future questions. It is about whether you have the correct documentation, processes, knowledge and understanding to complete the declaration in the first place.
That is a very quick overview. Going back to the automotive sector and the big importers, they may already use a special procedure called CFSP, customs freight simplified procedures. They can make a simplified declaration at the border which allows the goods to progress, and then they do a supplementary declaration, normally about a month later, fully to clear the goods. That is a trusted relationship with customs, and you have to be approved to be competent enough to do that and have the appropriate software and systems in place to be allowed that particular procedure. So there are ways around it, which may be relevant to some things that we may talk about later.
You asked also for a typical export—and this will be briefer.
Baroness Armstrong of Hill Top: Before you move on from imports, do you have any idea of what proportion of total clearance falls into the category of those that get it automatically, those in the middle category and those where there would be an inspection?
Clive Broadley: I do not have that information, but customs would. If I may say so, you have to be careful with statistics, too, because if they talk about the majority of trade, if they are talking about value, that is not talking about the number of declarations that have to go through the system.
Baroness Armstrong of Hill Top: But we could ask them for both.
Clive Broadley: You could indeed, yes. They would have those statistics.
Lord Dubs: What is the difference between the time it takes to do it now as opposed to the time it would take under the system that you have described? What is actually the burden on business people?
Clive Broadley: There are two aspects to that. One is the suggestion that is below the line, the FTA’s proposal, which is not what happens at the moment. What happens at the moment is as I have described, and the delays are more frequently caused by the lack of paperwork. The paperwork issue is complex, and I do not want to take up lots of the Committee’s time, as I could be here all day explaining it. But, depending on the payment terms with the overseas supplier, sometimes the paperwork has to pass through the bank under something called a letter of credit. There can be delays in that paperwork coming and, as I have explained, without that paperwork we cannot even begin to do the customs entry.
There are potential delays. The other delays can be congestion at the port and lack of transportation to go to pick up your container after it has been cleared. There could be other holds—holds put on because they are under licence or through port health, as well as through something called CITES,[3] the convention on endangered species. If you are bringing food or bone, dead or alive, holds may be put on while your inspections and checks are done. There are those reasons, but in fact most clearances, if you have a good broker and an experienced importer, go through the system fairly quickly as it stands. So it is the logistical and paperwork side that is more likely to cause you a delay than the actual clearance through the system.
The Chairman: And systems have to be put in place to be able to take a whole new scale once we leave Europe.
James Hookham: I want to make sure that the Committee is aware that the diagrams that we have provided relate to the current arrangements and possible future arrangements for UK-EU traffic. What Mr Broadley has described is obviously non-EU trade at the moment.
Q3 Lord Risby: We obviously do not yet know what the nature of our customs or trade relationship will be, hence the question about non-EU countries. If I may say so, you have very comprehensively covered in some detail how it works. I happen to be deputy chairman of the Small Business Bureau. Of course, there is a lot of anxiety. You are saying that, of course, all sorts of different businesses will react in different ways. So, if you are a large business, you may not use a customs broker perhaps in quite the same way—I am not sure. I would like to understand what happens with businesses that are anxious to maintain their business relationships but are small, and the efficacious nature or not of their using customs brokers, versus large businesses, which presumably have departments completely dedicated to the whole customs process anyway. Could you help us, because this is an area of some concern out there in our commercial sector?
James Hookham: Absolutely, and it is of great concern to us as the Freight Transport Association, because many of those small businesses are our members and are looking to us to answer some of those questions.
It is very important to understand that, in arriving at that negotiated settlement with the EU, it is our declared intention to ensure that these issues are included in the negotiations taking place between the UK and the EU, because we feel that they are critical to a successful Brexit. The ease with which trade continues at its current level with the other Member States should be a measure of success. In our conversations with HMRC and other parts of government, we are positioning the need to simplify these processes as much as possible as a clear priority.
Clearly, the rest of world trade will continue as has been described. With the negotiations, we have the opportunity to maintain as close to frictionless arrangements that we currently have, and we urge the Government to include that in their negotiations. I fully take your point that a lot of smaller businesses could simply decide that the costs, challenges and inconvenience introduced by a hard customs border are simply not worth the effort and will cease to trade with their customers in Europe, which would be a retrograde step.
Clive Broadley: Perhaps I might add a little to that, to be specific as well. Most of those smaller companies almost certainly use a broker to undertake their clearances. They do not have the expertise or the knowledge. But there are other issues. When you are doing your clearance you have to pay import VAT and duty. Under the rules, that payment has to be immediate, but there are concessions. You can have what is called a deferment account. That allows you to defer the payment of VAT and duty. We are potentially talking about considerable amounts of money, depending on the duty rate and the value of the goods, plus 20% VAT. But you can defer that payment only by having a bank guarantee for twice the amount that you may defer in a month. It is twice the amount because, under that arrangement, the payment is taken on the 15th day of the month following the transaction, so at the beginning of a month you could bring in a lot more importations which would then not be covered if you had only a month covered—so it has to cover two months.
That is a considerable burden on companies. Those dealing only with the European market have no requirement for this. They will have to go to their bank and set up a deferment guarantee arrangement. The UCC[4] changes that came about in 2016 now insist that companies put up a 100% guarantee for all procedures unless they are AEOC[5] or they meet AEO-equivalent standards, in which case they may get a guarantee waiver or a reduced guarantee. A lot of the European-only traders have no knowledge of this and no requirement to put up that guarantee. That guarantee is a facility against their borrowings as far as the bank is concerned. These are wider issues that need to be understood, rather than focusing just on the mechanism for getting goods through the customs clearance system. The imposition on small business is going to be considerable.
Lord Risby: I have one small additional question. You have made the point very tellingly about the importance of this for small businesses, which we rely on enormously in this country. You are inviting us to make sure that the Government are aware. We will do our best in our report, I am sure. I am sure that the Federation of Small Businesses and other organisations are very alive to these issues. Are they working with you or related organisations to make sure that the Government are aware of this—is this actually going on at the moment?
James Hookham: Yes, it is, and inevitably it is bound up in the current debate about the merits of remaining in a customs union—or not. The position of the Freight Transport Association has been to accept the Government’s declared outcomes—that we will leave the customs union and the Single Market—and we are leading the discussions with the Government about managing the consequential effects of that. That is really important, because we have yet to see any great decision being made or clarity being given about the Government’s contingency plans for a hard or relatively hard Brexit and whether or not a lot of the requirements that Mr Broadley has been describing, which are there for rest-of-world trade, will be required for trade with the EU.
Our sincere hope is that they will not be and that a simpler arrangement will be negotiated, but we need to think through these consequences so that the costs of them are understood and the Government are aware of them. Also, as I have said to other Committees before, we need to make sure that these issues are recognised by the other EU27 Governments, because it would not be sufficient for just the UK to make these preparations; we need the reciprocal and equivalence arrangements in place because an export from the UK to the EU is an import to it and, especially on the cross-Channel ferry routes, delays at import would affect queues in the UK equally.
Q4 Lord Horam: I want to follow up Lord Risby’s point about your example of a small business using a broker. Is the cost of using a broker a factor, or are they relatively efficient and cheap and the more important issue is the sheer difficulty and complexity of the paperwork and all the rest of it? What really puts people off exporting?
Clive Broadley: Importing and exporting, sometimes. It is mainly understanding the rules and regulations. I should explain that export risks are different from import risks. Staying on the import side, there are a number of things that put small companies off doing their own entries. One is that you need the software to be able to interface with the CHIEF system but you also need the skill sets to understand the customs rules and regulations and the coding that needs to go into the current system.
The CDS[6] might be slightly more user-friendly; we do not have all the parameters for that yet. Getting your commodity code or valuation wrong for customs stores up a potential problem that manifests itself only when a customs officer comes in to audit, perhaps two or three years down the line, and discovers that you have been using the wrong commodity code and underpaying your duty, and suddenly you are faced with a big bill. You can get a penalty as well. That is what puts off most small businesses. They simply do not have those skill sets or technical connections.
A number of the brokers and freight forwarders offer the deferment arrangement, so a smaller business does not have to put up a deferment. It can utilise the forwarder’s deferment—up to a point. It is not unlimited and if in a month the deferment has no scope left in it, you have to make fast payments into the customs system. All this takes time and can be delayed. Those are the typical issues that the smaller companies have. That will not change—except that many of them will have no knowledge of any of this if they suddenly face a hard border.
Q5 Baroness Armstrong of Hill Top: How do the requirements and physical checks differ between exports and imports—you have given us a very full description of the imports—but also between the different methods of transport, whether it is air freight, roll-on roll-off ferries, traffic or sea freight?
Clive Broadley: On the point about the different modes of transport, there is not a huge difference in the process. The process is much simpler because there is no revenue collection going on; it is statistical. Typically, when your export is ready to move, a ship or an aircraft or a road trailer will be nominated and your cargo will end up at the port. If it is an export to a third country outside the EU, an electronic declaration goes into the CHIEF system in the same way, but it has to be put in ahead of the cargo arriving at the port. The port then receives the cargo and intervenes on the system and posts an arrival message that allows the cargo to progress—it is called permission to progress—on to the ship or aircraft.
That mechanism is there from a control point of view. Customs’ interest, along with that of the export control office, is mainly: are you shipping goods to a country that is a sanctioned? Are you shipping goods that are subject to licence? Are you shipping dual-use goods, which are very difficult to determine? Having that hold situation allows customs to intervene in the system and say, “Stop. We want to go and check this. We think it is going to a dodgy country and, by the way, we do not like the goods”. That is how it works. That is much more straightforward.
In the main there are no real delays. Then you get a copy of that entry, which is also relevant to exporters, because they zero-rate their invoice to their customers on the basis that the goods are being exported out of the EU. They therefore need that evidence to demonstrate that the goods have gone. It is an area where there can be an awful lot of diversions and fraud. It is potentially open to fraud, and those measures are there for that reason.
Baroness Armstrong of Hill Top: What about relationships within the EU on exports? I come from the north-east and we do a lot of exporting to Europe. I understand that it is the regional chamber of commerce that does a lot of the documentation and keeps on top off things—works with Nissan and all the other companies that are exporting and does a lot of the hard graft on things. It has to do some things because it has to assure the EU that it is working within the rules of the Single Market.
Clive Broadley: I need to correct some of that, because the chambers of commerce do not necessarily do an awful lot of work.
Baroness Armstrong of Hill Top: The north-east one does.
Clive Broadley: There are two standards. If the goods are going to an EU Member State customer, there are no requirements, full stop. It is no different from putting your goods on a lorry here in London and sending them to Leeds. There are no regulations involved. There may be standards or Common Agricultural Policy things, which are very different.
Baroness Armstrong of Hill Top: Or rules of origin for cars.
Clive Broadley: Yes, but there are two other scenarios. One is that, if you are sending goods to a preference country such as Switzerland or Norway, you can complete a preference document called an EUR1—there is no other way of describing it, that is what it is called—which says that these goods have been manufactured within the EU or they have been processed to such an extent, although they may have components that have been imported, that they qualify for EU manufacture. Completing or processing an EUR1, which is what chambers of commerce will do for you, basically verifies the fact that those goods qualify for preference. When they arrive in Switzerland or Norway and that document is available, Norwegian customs will either charge zero duty or a reduced duty rate within the tariff. That is where the chamber would come in.
The chambers do other things, too. If you are moving goods to an exhibition in a non-EU destination, they may produce something called a carnet, which is a customs control document that accompanies the goods at every stage as they are exhibited in different parts of the world. If you are exporting to a country where there is a political origin issue—such as in the Middle East—the chamber of commerce will produce certificates of origin which are basically political. I will not go into all the details but they are not about preference; they are about a political statement. That is what chambers do. A chamber may give support in doing workshops and seminars, of course.
Q6 Lord Dubs: Let us turn to the Government’s document on the future customs partnership,[7] which outlines two options. The first aims to decrease, as much as possible, the need to check goods at the border by implementing technological solutions. Are there any technological solutions that you can point to that are actually working at the moment? Could you give us some examples? Would they be relevant to our situation here?
James Hookham: This has been an early campaign of ours to ensure that we do not have to settle for the way things are at the moment and that there is the opportunity, if hard borders do arise for EU trade, to effect these simplifications. We have published a document to summarise those, which the Committee was supplied with. It is helpful to think of these in two categories. There are simplifications and easements that can be offered to the process that Mr Broadley has been describing, whereby there are exemptions or recognitions or things happen at different times, and that is within the gift of customs to provide, depending on their recognition of the trader.
There will remain processes which in the past have been done manually but we believe could easily be automated, although we recognise two things. One is the need to make the investment at the points of entry and exit from the country—there will be lead times and business cases to make there—and I repeat my point that similar arrangements need to be provided at the points of entry into the rest of the EU. We are certainly encouraging other Member States to think similarly and to either invest in the technology to make the assessments or reciprocate the easements that we have been describing.
Lord Dubs: But there are no working examples of where these systems have been put into practice.
James Hookham: There may well be in trade with the rest of the world, with third countries, and certainly some of the easements we have described are available for trade with the rest of the world, but they are there by agreement and negotiation. As I said earlier, it is important that in the negotiations with the EU, similar arrangements are incorporated into the eventual trading relationship that we have with the EU. They need to be formally picked up, addressed and incorporated. They will not be there by default. The default arrangements are quite severe and imposing. There are many, many easements, which are summarised in our paper, which could be introduced into future UK-EU trade were both parties minded to do so. That is the challenge that we face in persuading them to do that.
Lord Dubs: The thing that puzzles me is that people keep talking about the border between Norway and the EU. I would have thought that two advanced, sophisticated countries such as Norway and Sweden would have these things up and running, yet they do not.
James Hookham: There are two important points there. One is that Norway remains in the European Economic Area and the Government are saying that that will not be the case for the UK. I need to point to the very much lower volumes of traffic and frequency of crossings that occur there. One of the tests of any technological or procedural innovation would be whether it can cope, particularly with Dover Strait traffic, with the very high volumes and frequencies and the high peaks as well—not just peaks during the day or the week, because certainly in the build-up to Christmas and other public holidays there is a marked increase in the movement of traffic to and from the country.
Lord Dubs: I am still not clear. People keep talking about the Norway-Sweden border as something we want to look at. Are you saying that, because of the low volume of traffic there, they do not need the technology—or are you saying that the technology could apply there but does not yet because they have not got it worked out?
James Hookham: Sorry, yes. There are certainly examples—Norway-Sweden and indeed elsewhere—and, as I say, some of the technologies are already deployed for rest-of-the-world trade. So, yes, by all means let us use the example of Norway and Sweden but that is not a reliable analogue for what we need to replicate, particularly across the Dover Strait and the Irish Sea as well.
Lord Dubs: I was not arguing that it was a good example. I was arguing that it was an example of where the technology has not been applied and is not working. One would have thought there was a good case for it to work there, because it is a simple example.
James Hookham: Of course, we do not need to at the moment because we are in the European Union—
Lord Dubs: The Norwegians are not.
James Hookham: No, and they have gone down the route of using the technology. As I say, I accept the principle and most certainly would promote it and point to examples of where it has been deployed. Another good example is the easements that have been introduced between the EU and Switzerland. Of course, we retain the hope that many of these easements will not be required, because those requirements will have been negotiated away. But, until we know the exact nature of the relationship, we will not know what we are shooting for and which of these various arrangements would actually be relevant and useful.
Q7 The Chairman: Thank you. I have a quick question on cost and the sort of understanding that businesses need to start factoring in—the cost implications of different customs exchanges. If we are to remain competitive, what would your advice be on how to keep those costs as minimal as possible? Administratively there will be costs, but maintaining the physical assets will also have a cost implication.
James Hookham: Yes, and in addition to the compliance costs, if we can call them that—meeting the requirements that we have described—there is obviously the potential impact of new tariffs. Again, we need early clarification from government on what the tariffs will be so that, if they are imposed on British exports, manufacturers can understand the final selling price, calculate the new selling price to customers in the EU and take steps to maintain competitiveness, and address the cost base elsewhere in their business where they can, to try to recover their costs. That remains a big challenge.
The cost of compliance I hope can be reduced, to build on the points that Mr Broadley made, by HMRC recognising Lord Risby’s point—that there is a very large community of new users of the customs system, predominantly in the SME sector, which has no experience of this and, at first sight, may well be dissuaded from continuing to trade, just because of the management challenge and task of coming to terms with all the new requirements. I hope—this is a message to the Government—that many of these can be negotiated away in a good trade agreement with the EU, and I hope they will not come to pass. But you are right to assess that that would have a major impact on volumes in future.
The Chairman: Perhaps you can capture it in the comments that you will make in response to Baroness Suttie.
Q8 Baroness Suttie: Returning to the technological solutions, how long do you think that it would take to implement such a system?
James Hookham: To be blunt with you, we are discounting any real introduction of this prior to certainly next March and, probably, before the end of 2020. We simply believe, with experience of lead times and construction times, that it is unlikely that a lot of this will be ready. A point that we make constantly to government is that you may well have your own estimates of delivery of finished systems, but please provide in your planning for the fact that businesses—our members—need to understand the new systems, learn how to use them and become familiar with them. Customs are not generally in favour of a trial and error approach in declarations; you need to get it right first time. We need to provide for a learning curve for businesses as well.
Baroness Suttie: Do you think the transition period will be long enough?
James Hookham: Not for the automation on the scale that I believe will be required if there are significant new requirements placed on EU trade. That is certainly not something that we could be confident in advising our members to rely on, given that the first challenge is for HMRC to deliver its new customs declaration system, CDS, reliable and bug free, in sufficient time for existing and new traders to understand it and come to terms with it. That is a big enough challenge in itself.
A subsequent phase in which technologies that are currently used in rest-of-the-world trade, for example in Felixstowe and Southampton, are introduced at Dover or Holyhead might come in the first five years after leaving. It is of that order of magnitude, from initial commissioning to actual deployment and familiarity. That would be my estimate in terms of my experience. If the Government can be persuaded to devote the money, time, effort and resources to deliver earlier, we would be in favour, but it would be a medium-term prospect rather than a short-term remedy in time for the date of leaving. That would be my advice to our members at this stage.
Clive Broadley: Technology is key to this. If it is not efficient and not flexible and does not allow smaller companies with less experience to use it on a user-friendly basis, that is an issue. But there are other costs, too. The reality is that there is a massive skills shortage within the trader sector. Businesses rely very heavily on a broker, and if they employ a broker they will incur costs for their service fees. Typically, an import entry might be £35 to £70, depending on the agent, although there may be cheaper rates than that. If they use that agent’s deferment, typically that agent may charge 1% to 3% for the use of that deferment. Those kinds of costs arise.
The big issue will be with road transport coming in. If it stops at the dock, the imposition of costs is massive. A driver-accompanied trailer waiting for a day will probably cost £200 in what we call demurrage charges. Worse than that, he has probably now missed his next collection slot, which means that he could have lost a complete day’s work, which you can never make up on a truck.
There has to be a solution that does not stop trucks and trailers at the port, which may be something like the customs freight simplified procedures, which I talked about earlier, whereby you can do a very simple electronic entry to get those trucks moving and do a supplementary entry later. To do that, you will need the skill sets as a business, or employ them through a third-party supplier, but you will also have to get approval from customs authorities to demonstrate that you meet the standards of competence and technology required to be given those permissions to make supplementary declarations. This is a high risk, because the goods have now come into the market, and the risk that you then do not pay your VAT and duty on them is quite high—not deliberately, but because you do not have the systems to control those goods.
Q9 Lord Horam: We are talking about the first option of the Government’s two options in their customs White Paper—we have a customs border, but we have the best possible technological solution. What you are really saying is that you are rather sceptical about the length of time that it will take to put all this in place. Five years is much longer than two years, which is much longer than what we are talking about for the transition period.
Let us come to the second option, which is described by David Davis as “blue-sky thinking”—the new customs partnership whereby the border in the UK mirrors the border of the European Union, effectively remaining the same, so there is no customs between the UK and the European Union. We would charge rates and, if the rates were different, we would have to track those goods to make sure that they did not go into the European Union.
I am interested to know what you think of this, because it has been described as blue-sky thinking and rather theoretical. Presumably, on day one of this, if it came into practice, the rates would be the same, because we would not have changed the tariffs as between ourselves and the European Union on day one. It would be only subsequently that we would change them. So on day one there would be no need to track goods that remained in the UK, because they would be charged the same tariff rate as everybody else. Is my understanding of that correct?
James Hookham: Yes, if that assumption holds, that will be the case—if on day one the tariffs remain the same.
Lord Horam: So we could have a system whereby there was no border at all but all goods would come in, we would charge the same tariff as the rest of the European Union, and there would be no need for any of these customs procedures, as there is not now.
James Hookham: Indeed. Certainly our initial assessment of it was that we welcomed the bold thinking, because to overcome some of these problems we need to think outside the box. We are certainly receptive to the idea, but the reaction of our members—and they know more than is in the White Paper—is that it puts a lot of expectation and requirement on businesses to make that separation, as you described, and take that responsibility for keeping UK-only goods separated.
Lord Horam: That is if the tariff is different.
James Hookham: If the tariff was different, yes—and, given that the tariff may change at any point at the Government’s behest, I would imagine that businesses would need to establish those separation and tracking requirements from quite an early stage in the process. Unless there was some kind of guarantee that we would remain at the same rates for some time, as a business you would be faced with the possibility of a short-term notice of a tariff change and having to effect that tracking and separation. So it would be something that you would want to plan for, if you were signing up to that particular arrangement.
Lord Horam: Is this tracking arrangement practical?
James Hookham: Technologically, undoubtedly it is. I am sure it could be done. The important point about the scenario described in the White Paper is that it ultimately comes down to a continuation or a reinstatement of the trust that currently exists between customs agencies within the EU. None of this is an issue at the moment because all customs agencies in the EU trust each other. They devolve responsibility for the enforcement of EU tariffs and standards to each other. Therefore there is not this problem at the moment.
Lord Horam: Presumably the worry is that people might game the system.
James Hookham: Exactly—and therefore, in considering the arrangement described in the White Paper, the UK would need to convince the EU that this is something that could be delivered to its satisfaction. Indeed, it is conceivable that the UK will have different or, indeed, higher standards and may wish for goods from the EU to be selectively filtered. That is a conceivable consequence of that arrangement. It will all come down to not the technology so much—I am sure that can be delivered—but whether the trust that currently exists that allows the Single Market to function can somehow be reinstated outside the Single Market construct and allow these kinds of arrangements to be put back in.
The Chairman: I am mindful of time, Lord Horam, and Lord Risby has to leave. We may come back to your question.
Lord Risby: I apologise, because I have to leave now. We have agreed in our discussion that we do not know what the final picture is going to be, obviously. But Mr Hookham, you said you accepted the Government’s view that there will be no customs union—you are working with that, shall we put it like that?
James Hookham: Yes.
Q10 Lord Risby: So even if we had some sort of partnership arrangement, it would be different in some form or another from a customs union. The Lord Chairman mentioned price, I think. We have talked about the impact on businesses, particularly small businesses. I would like to understand this from the Government’s point of view and the infrastructure that is necessary to provide a more comprehensive customs structure to cope with this. What is in your minds, with the imperfect information that we have thus far, about this? Do you have any sense of how the infrastructure would need to change, improve or enlarge without knowing the actual outcome? You must have been thinking about this.
James Hookham: Absolutely, and commenting on it, because the prospect of very substantial delays and queues, both in the UK and in France, particularly with Dover Strait traffic, and equally the potential interruption to Irish Sea traffic, is of great concern. The problem we are trying to deal with is that we do not want to presume a particular outcome, but we need to plan for the worst and hope for the best. In advancing our priorities for the negotiation, we have tried to understand the early decisions that can be made and therefore the actions that businesses can get on with, even though the final picture is not clear.
One early action we believe the Government could take would be to formally confirm—because we think we know the answer—the classification tariff that the UK will use for the customs classification of imports. The business community, which currently has no experience of this, will almost certainly need to make declarations of goods exported or imported into the EU. Whether it will have to pay tariffs on them remains to be seen. But the quite sophisticated and risky process of undertaking classification is something that we could invite businesses to get on with now, especially with the transition period. So an early decision from the Government about what classification tariff to use would be really helpful and would allow us to offer some confidence to the business community about something it could usefully be doing now.
Lord Risby: Thank you, and I apologise again for having to leave.
Q11 Lord Horam: Coming back to the two alternatives, obviously you understand what they are, Mr Hookham, and you think it is feasible to have this tracking arrangement. Do you agree with that, Mr Broadley?
Clive Broadley: I think it would be incredibly complicated to manage. At the moment you can bring goods into the customs warehousing regime that are under different customs statuses. They do not clear customs until you decide whether you are going to clear them through into home use or re-export them or move them on inside Europe.
Lord Horam: So that facility exists now.
Clive Broadley: It does, but you have to have a warehouse and the software and systems to go with that. You have to be approved and you may have to put up a guarantee to customs to be approved. The infrastructure costs on business would be considerable. Otherwise, you would be trying to bring in goods that would potentially have different duty rates applying to the UK and the EU, so managing that within the system would be difficult.
What companies tend to do now is bring in goods that they clear at the point of entry using various processes, which we have talked about. They are then free to use those as common stock. So they go into their system as common stock and they can do what they like with them. They can use them for their own production processes, send them on to Europe or export them to a third country. How you are going to track and trace cargo coming in at different duty rates with different customs statuses, and how that is going to work in the EU in terms of VAT and allocation of the duty, we are not privy to—so it is difficult for us to comment.
Lord Horam: So you would advise the Government to keep the same tariffs as they have now?
James Hookham: It would certainly make the operation of that scheme easier.
Q12 Lord Horam: Now for the crunch question: if you were the Government and had these two alternatives, which would you prefer—to have a customs border with all the technological gizmos that you can or this blue-skies partnership arrangement?
James Hookham: I think that it is for us to declare to government which outcomes we would prefer.
Lord Horam: Yes, tell us.
James Hookham: As I said at the beginning, we are very concerned by the stated intention to leave the customs union. But in the same speech the Prime Minister assured us of her intention to seek a continuing frictionless arrangement. Both these scenarios could in theory deliver a frictionless arrangement, depending on the degree of investment and time that the Government are prepared to make into keeping the arrangements as simple as possible—and of course the willingness of the EU to recognise and work with these arrangements.
Those are politically deliverable outcomes. Obviously, we would be prepared to contribute and work with the Government in understanding the business consequences of those, but we are very clear what we want out of this—the reduction of friction and the retention of the current arrangements as closely as possible—and we are prepared to work with government on either of these options to see where they could lead us.
Lord Horam: You do not have a strong preference one way or the other.
James Hookham: We have a very strong preference for the outcomes. I repeat that we are prepared to look even at options which on the face of it may seem quite challenging in cost and technological terms, but certainly the Freight Transport Association is prepared to think constructively here and bring original thinking to bear on the matter.
The Chairman: Given that we have a year to go, the Government really need to get some strong preferences in place for them to be able to make some core judgments. Trade associations really have to start making sure now that the preferences that reduce major impacts on business are heard loud and clear. For us to be comfortable, we need to hear industry’s preferences quite strongly now, because the time for businesses to prepare is getting quite tight.
James Hookham: As I said at the beginning, our positioning here is that we need to keep Britain trading, which remains our mission, and there are some really important things that will ensure that that will happen. For the record, I also point out that, quite separate from the customs issues that we have been describing, there remain several other important factors that could completely derail this, if they are not sorted out. One of them this House is considering at the moment—the issue of international haulage permits in the Haulage Permits and Trailer Registration Bill.
There is also the small and some might say trivial matter of driver qualifications, because the traffic that is being described here is accompanied by a driver, and the current mutual recognition of driver qualifications will lapse upon Brexit. We will need that reinstated to ensure that satisfactorily cleared goods and permitted lorries can actually be driven to their destination in the rest of the EU. We have summarised that in our eight-point agenda for government in the things that they need to address in the current negotiation period to keep Britain trading.
Lord Horam: Sorry, were you about to say something, Mr Broadley?
Clive Broadley: I think that option 2 is very conceptual. You were asking for a decision on whether we wanted option 1 or 2. Without knowing more about option 2, it is very difficult for us to say.
Lord Horam: You do not know enough to make a judgment—is that what you are saying?
Clive Broadley: It sounds difficult and complex, but there may be factors there that we simply do not know about.
Q13 Lord Horam: Can I switch to another subject, CDS, which is now coming in or is proposed. It has not yet happened.
Clive Broadley: It is under trial at the moment.
Lord Horam: There is a trial at the moment. It is presumably pure chance that CDS has been worked on for several years. It is an improvement on the present system—more digital, and so on—and it is just chance that Brexit happened more or less at the same time it was due to come in. What effects will that have? What is the interplay between those two developments, the introduction of CDS and Brexit?
James Hookham: I will simply make the point that I made earlier: the timeline for the delivery and rollout of CDS needs to provide for the training, induction and upskilling of users of the system, so that they are comfortable and fluent with the system in time for Brexit. This is not something where we can have an adaptation or interim period. The system needs to be deployed in time for traders to be able to use it and be getting their declarations right.
Lord Horam: I understand that it has been delayed by a year or so. Is that right?
Clive Broadley: It has been delayed for a great many years. CDS was talked about five, six or seven years ago, and then CHIEF was upgraded to plug the gap. These are very difficult software challenges, it has to be said. It will need a massive workload if, suddenly, we have all the EU declarations to add to it. I believe that they have taken that into account.
I used the word “trial” before, but it was probably incorrect and I should have said “testing”. They are working with selected practitioners within the sector and within the software houses, because it is the software messaging going into CDS that is key. So they are doing a section at a time, and the rollout principle seems very sensible in that they are going to roll out bits of it and keep CHIEF in place to handle the exports.
The slight concern is whether they will be ready, because they are talking about rollout potentially being in January of next year. Were negotiations to collapse and we ended up with a hard Brexit, potentially in March, it leaves a very small window for such an ambitious IT programme. You cannot guarantee that there would not be fall-back requirements or problems.
Q14 The Earl of Oxford and Asquith: My question is really about the EU 27 to respond to whatever we decide on. You have already put down a number of caveats as to what that capacity is. It has to work in a reciprocal way, particularly on the documentation side. Can the EU 27 really put in any systems until we have made up our minds about which one of all the permutations we will advance and have as preferences, to take up Baroness Verma’s point?
James Hookham: They have the great benefit of knowing what system they want to operate—because it clearly is the current system that they operate for third countries at the moment. For that reason, you see Dutch customs being quite well advanced, because they will simply extend the infrastructure and provisions that they have in place in Rotterdam and adapt and use it for the relatively small amount of goods directed into the EU through Dutch ports. We see progress there, but less so in other Member States—and, of course, to go back to our earlier discussions, we are a little concerned about the emphasis being placed on the recruitment of additional customs officers because, on the face of it, that would suggest a very manual process, which in itself would imply additional delays.
As I said earlier, there is a lead time here, even if you know what new system you are trying to design, commission, build, deploy, test and debug. One of the major messages that we have taken to the EU 27 is that they need to think about this as well. On Brexit, the EU border will fall back to the mainland and into the Republic of Ireland. That is not just a challenge for Britain; it will be a challenge and task for them to undertake, because they will be responsible for enforcing the border in a different way from what happens at the moment. My estimate from feedback is that they are about nine months behind us in their thinking—
The Earl of Oxford and Asquith: Nine months behind us?
James Hookham: Yes. In my experience, there was an expectation or hope that Brexit would not happen or that a negotiated outcome would arise in which none of this would be needed. Only in the past few months—one would like to think because of the campaign that we have undertaken—has the realisation become apparent that there is a job of work to do. There are budgets and resourcing to be agreed. Only now are we seeing the process starting of trying to understand exactly what is needed and what systems need to be deployed.
The Earl of Oxford and Asquith: On the technological side, some people will argue that a lot of the solutions belong to the world of magic flying carpets and riddle-solving unicorns. If we go down the technological route, that would surely have implications on the other side as well.
James Hookham: Yes, it would. As I say, they are great users of technological implications—I am sure that Mr Broadley has a lot of experience of that. As for recognising the need for it and accepting that this will be a consequence of Britain leaving the customs union, I think that the realisation has been a little slower to dawn on the EU27 Governments and agencies than it has been here.
Clive Broadley: There are real concerns around this. Take the example of a trailer loaded with fruit and veg in Spain. At the moment, it can be in the UK in two or three days, or even faster with two drivers. It does not stop. The produce is in the supermarket probably the day after it has arrived here. If the trailer has to stop, that becomes an impossible supply chain for fresh, perishable goods. Facilitation is absolutely key.
The other thing that will happen now is that that Spanish load, when it reaches the French border, will have to demonstrate to the Spanish authorities that the goods have been exported. It has to travel up under an accompanying document, the EX1, which has to be processed by the French to demonstrate that those goods have left the EU as an export—that is if we do not get the other scenario of some kind of customs arrangement. So there are practicalities again in how you deal with that situation.
On the potential cost—this is not a political statement, as we are not here to make political statements—due attention has to be paid to customs resources. They are stretched to the limit now. They have CDS coming in. They have to cope with volume 3 of the tariff changing codes and systems. The UCC changes mean that companies out there enjoying a special procedure have to reapply by March 19 for all those authorisations as a customs warehouse or inward processor and for their deferment accounts. They have to establish a comprehensive customs guarantee. All that has to go through customs teams and offices that are already overloaded. That is now, before the implementation of any tariffs or a hard-Brexit situation. Those teams will fall over. They cannot do it. AEO comes up later, although you may wish to defer that subject to another question.
The Chairman: We have run out of time, I am afraid. It has been a very interesting session. We will put in writing the question that we have not managed to get to this morning, if we may, and it would be helpful if you could provide a response in writing. I would like to finish on what you were just saying, Mr Broadley, as I glanced at the clock and thought, “We’re already out of time on this session”. You were talking about the impact of insurances having to change once you are outside the EU—the liabilities of insurances and those sorts of services that will be expected. If you could give us a response on that in writing, that would be helpful to us, because there are issues that we have not really spoken about. They are not tangible items but they will have an impact on providers.
Let me say on behalf of the Committee that this has been a very interesting session for us. It has provided us with much more of an education on the challenges that your industry will face, so we thank you very much. Please send back to us anything that you think has not been transcribed accurately and we will get it corrected. Thank you very much for coming in this morning.
James Hookham: If it would be helpful, we would be interested in facilitating a visit by the Committee to see some of this in real life at one of the ports. I think that Mr Broadley would also be prepared to offer members a workshop on the more intricate details, if that would also be helpful.
The Chairman: Just to pre-empt you, we already have in place an opportunity to visit two ports, Felixstowe and Rotterdam—one on either side—to hear from them what they feel the challenges will be. After that, we will follow it up with you. Thank you very much indeed.
