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Brexit: HMRC Impact Assessment
On 10th October 2019 HMRC released an impact assessment outlining a contingency estimate of costs to business, in the event of a no-deal Brexit.
This edition includes the impacts of the customs, VAT and excise regulations laid before parliament in February, March and September 2019, and adds to the impacts that were published on 25th February 2019.
HMRC discuss the impact on businesses and individuals in the event of a no-deal Brexit of introducing new customs legislation and amendments to existing VAT and excise legislation. The combined impact on UK and EU businesses is evaluated to be £15m.
Rationale and evidence of analysis
HMRC have used a Standard Cost Model to calculate the administrative burdens the new regulations will place on business. This is an established method that uses an internationally recognised framework based on data collected from businesses and a methodology which produces consistently calculated estimates. This data is combined with other data available to HMRC and used to calculate the administrative burdens on business of submitting business calculations.
The document has been created to understand and communicate the implications to businesses and individuals of enacting TCTA 2018.
The cost of submitting customs and safety and security declarations, paying import duty and import VAT and mitigating facilitations and temporary easements.
The Customs (Import Duty) (EU Exit) Regulations 2018, the Customs (Export) (EU Exit) Regulations 2019 and the Customs Safety and Security Procedures (EU Exit) Regulations 2019 set out the detail of a new UK customs regime for the importation and exportation of goods between the UK and the rest of the world. These regimes already exist for goods in transit between the UK and the rest of the world, however now there will be a significant new administrative burden for businesses moving goods between the EU and the UK.
These are set out:
- When and how goods are presented to Customs.
- The clearance process.
- The point at which businesses are required to submit customs declarations and safety and security declarations for import and export purposes.
- When import tax and import VAT becomes payable, and when these can be deferred.
For customs, HMRC have extended a series of facilitations to UK/EU trade such as the authorised economic operator accreditation, special customs procedures, temporary storage and transit arrangements which will allow businesses to optimise the most efficient and cost-effective practices to interact with the customs regime. VAT registered businesses will be able to apply to post-pone accounting to import VAT.
HMRC has also introduced temporary easements to simplify the declarations process, and remove the requirement for safety and security regulations for goods coming into the UK, to maintain the flow of goods on Exit day and facilitate the trade flow of goods
HMRC estimates the costs incured by businesses who interact with customs to vary between £15 and £56 according to the business requirements (updated to reflect 2017 data) per declaration. HMRC has used a segmentation approach to look at the new declarations and costs for 5 different groups of businesses, differentiated by their trade volumes and use of intermediaries.
The latest static estimate for the annual administrative burden on UK businesses from additional import and export declarations is £7.5 billion (updated to reflect 2017 data), with import declarations accounting for around half of this figure. The £7.5 billion estimates the administrative burden of completing customs declarations for all EU trade in goods movements.
|No of declarations||Import declarations (m)||Import declaration cost||Source||Export declarations (m)||Export declaration cost||Source|
|High volume large traders - insourced||39||£28||HMRC Research. Based on 1 and three-quarters hours per declaration. Average wage rate £15.60 per hour||14||£17||HMRC Admin Burden Toolkit reports cost of £17 per insourced export declaration|
|High volume large traders - outsourced||33||£56||£40 average charge from survey of freight forwarders. Plus assumed 1 hour per declaration for business to prepare information @ £15.60 per hour||66||£46||£30 average charge from survey of freight forwarders. Plus assumed 1 hour per declaration for business to prepare information @ £15.60 per hour|
|Fast Parcel Operators||22||£20||HMRC assumption||28||£15||HMRC assumption|
|Low volume, small traders – VAT registered||5||£56||Assumption that low volume traders outsource their declarations||4||£46||Assumption that low volume traders outsource their declarations|
|Traders below VAT threshold||3||£56||Assumption that low volume traders outsource their declarations||3||£46||Assumption that low volume traders outsource their declarations|
ii) Movement of goods from roll on roll off (RoRo) ports - the import procedure:
Businesses or their representatives will be required to make customs declarations in advance of the goods arriving in the UK at RoRo locations. In addition to advanced declarations, ferry operators and the Channel Tunnel operator (Eurotunnel) will be required to have a reasonable belief that businesses have satisfied this customs declaration requirement. In order to achieve this, ferry operator and Eurotunnel can include the advanced declaration requirement in their terms and conditions of booking.
(iii) Movement of goods from RoRo ports - the export procedure:
Under the standard export procedure goods must be made available for examination before leaving the UK. However, applying this requirement to RoRo ports would present a significant new infrastructure requirement and impede the free flow of trade through such routes.
Therefore the standard procedure is modified for goods exiting the UK at RoRo locations to ensure that only certain goods, as notified by HMRC, are required to be made available for examination. HMRC uses the export declaration to decide which goods to examine and the provision will allow goods declared for export permission to either progress as soon as they are submitted, or for the goods to be presented at an inland location if an examination is required.
This procedure is not expected to present any additional administrative costs to businesses beyond those already estimated for the completion of customs declarations for import and export purposes.
(iv) Movement of parcels by Fast Parcels Operators (FPOs) into the UK:
HMRC estimates that a proportion of the £7.5 billion administrative burden will be incurred by those making use of FPOs to submit customs declarations for UK-EU parcels. We have assumed that the cost of submitting these declarations will be lower than for other customs declarations. These new customs declarations will mirror the current rules used for parcels imported into the UK from outside the EU. Further details on this can be found in the HMRC impact note for the VAT treatment of low value parcels.
Further impacts are introduced by the Value Added Tax (Postal Packets and Amendment) (EU Exit) Regulations 2018 laid before Parliament on 18 December 2018.
These regulations make an overseas supplier who sends parcels to the UK containing goods valued at £135 or less, responsible for paying any import VAT that is due. For more information on the impacts of this regulation, refer to the HMRC impact note for the VAT treatment of low value parcels.
(v) Temporary easements
HMRC recognises the administrative burden of submitting customs declarations and the difficulties that businesses who have previously only traded within the EU may face when interacting with these customs procedures for the first time. As a result, a number of temporary easements (as set out in the regulations at point 6, 7 and 8 of this section) simplify the customs declaration process for a limited period after exit. This involves deferring the point at which a business is required to submit a declaration and pay customs duty to HMRC, subject to meeting certain requirements. These easements will help to temporarily reduce the overall administrative burden of complying with new customs obligations.
vi) The ongoing costs associated with paying import duty and import VAT
The payment of import duty must happen before goods are released from customs control and the amount of duty payable is determined by the value of goods multiplied by the duty rate in the UK Tariff. If the UK leaves the EU without a deal it would implement a temporary tariff regime. This would apply for up to 12 months while a full consultation, and review on a permanent approach, is undertaken. Details on the impact of this policy can be found in the Tax Information and Impact Note for the UK Tariff.
The current VAT treatment of EU imports (acquisitions) by a UK business depends on whether that business is registered for VAT:
- non-VAT registered businesses are charged VAT by the supplier at the rate applicable in the supplier’s member state – unless the supplier’s UK sales exceed the UKs annual ‘distance selling’ threshold (£70,000), in which case UK VAT is charged, these businesses are unable to reclaim the VAT
- VAT registered businesses are not charged VAT by the supplier and instead account for the acquisition VAT on their VAT returns, these businesses can reclaim the on the VAT return, subject to normal rules
If the UK leaves the EU without a deal, all businesses will be required to complete import declarations (with the associated administrative burdens in 1(a) of this section) and pay import duty and import VAT on goods from the EU for the first time.
VAT registered businesses would generally have to pay import VAT at an earlier time than they have to pay acquisition tax now. This would be a significant cash flow impact on those businesses.
To mitigate this the government has introduced The Value Added Tax (Accounting Procedures for Import VAT for VAT Registered Persons and Amendments) (EU Exit) Regulations 2019. These regulations allow VAT registered businesses to account for import VAT (from both EU and non-EU countries) on their VAT returns. This will give VAT registered businesses importing goods from outside the EU a significant cash flow advantage. The regulations at point 3 of this section provide more detail about the positive impact of this measure.
Businesses will be able to pay their import duty in a number of ways. Under the Customs (Import Duty) (EU Exit) Regulations 2019, they can also delay payment of import duty by an average of 30 days by setting up a duty deferment account. HMRC will require the duty to be secured by a bank, insurance company or building society.
It is estimated that over 145, 000 VAT registered businesses who currently only trade with the EU, therefore are likely to be new to customs procedures, will be impacted in addition to 100, 000 non-VAT registered businesses who currently only trade with the EU are likely to be impacted, in addition to an estimated 100,000 non-VAT registered businesses who also only trade with the EU. The costs (some of which will be one-off and others on going) are likely to include the following:
- Cost of appointing a customs agent if electing to do so
- Familiarisation with a new UK Tariff
- Setting up a payment method
- Additional record keeping requirements – businesses will need to keep records for at least 6 years and this may require new systems and processes
- One-off cost for arranging for a deferral account, unless already approved
- Ongoing costs of securing a guarantee to take advantage of deferring or suspending the payment of import duty
Under these regulations, businesses that have only previously moved goods to or from the EU will require a guarantee in order to defer or suspend payment of duty. While there will be an ongoing cost in securing a guarantee (from a relevant institution or an intermediary for use of their guarantee facility), businesses will only make that business decision if there are commercial benefits gained in deferring or suspending the payment of import duty which, in this case, would be a significant cash flow benefit.
However, the Customs (Import Duty, Transit and Miscellaneous Amendments) (EU Exit) Regulations 2019 and the Customs and Excise (Miscellaneous Provisions and Amendments) (EU Exit) Regulations 2019 introduce temporary easements which give businesses a period of grace to obtain a guarantee (when applying for a new duty deferment account), as well as relaxing the requirement to use a customs comprehensive guarantee. These easements should help importers access deferred payments more quickly and easily, improving cash flow benefits.
Excise businesses that have only previously imported excise goods from the EU may also need to make arrangements to gain access to a deferment account, but the temporary easements introduced through the Excise Duties (Miscellaneous Amendments) (EU Exit) (No 3) Regulations 2019 and the Excise Duties (Miscellaneous Amendments) (EU Exit) (No 4) Regulations 2019 also provided for HMRC to be able to allow a period of grace for securing a guarantee for imported tobacco products (similar easements can be made for other excise goods under existing powers).
c) The facilitation of applying to be an Authorised Economic Operator (AEO)
AEO status is an internationally recognised quality mark indicating that an operator’s role in the international supply chain is secure, and that their customs controls and procedures are efficient and compliant. This is a facilitation that offers a range of benefits including access to certain simplified customs processes, reduced requirements for guarantees when deferring import duty, and in some cases the right to ‘fast-track’ shipments through some customs and safety and security procedures.
Businesses can apply to be authorised for ‘customs simplification’ - AEO(C), ‘security and safety’ - AEO(S), or both. The Customs (Import Duty) (EU Exit) Regulations 2018 and Customs (Export Duty) (EU Exit) Regulations 2019 cover AEO(C) while The Customs Safety and Security Procedures (EU Exit) Regulations 2019 set out the rules for AEO(S).
The current benefits of an AEO(C) accreditation in the UK include:
- simplified customs processes: easier admittance to customs simplifications, fewer physical controls and the possibility to request the location that HMRC applies customs controls
- a 70% reduction in the amount required to be secured when giving a comprehensive guarantee
- a notification waiver when making an entry in a declarant’s records, which simplifies the process
The UK scheme is in place and existing AEOs registered in the UK will automatically be carried over and will not be required to re-apply.
Based on European Commission figures from 11 November 2018, there are 271 AEO(C) accreditations in the UK and most of them are from transportation and storage, manufacturing, wholesale and retail sectors. 1 It is difficult to predict, at this time, how many new businesses that only deal with UK-EU trade will seek to apply for this status but it is likely to be businesses from those same sectors. It anticipates that businesses would only apply if the costs of complying with the criteria are outweighed by the benefits of the scheme.
The benefits of applying for AEO status for small and medium enterprises may be modest relative to the cost, but HMRC still predicts significant numbers of these enterprises choosing to incur these costs. It anticipates that the cost of applying for AEO(C) status across all business sectors will lead to a significant one-off cost for traders.
The costs are likely to include the following:
- hiring external agents to help with the AEO application process
- purchasing of additional software to ensure the record keeping is maintained to certain standards
- initial familiarisation with procedures and complying with requirements
An AEO application is ultimately a commercial decision which businesses will take if they believe the long term benefits will outweigh the cost of applying, and offset the overall cost of interacting with the customs regime, for example, by making it quicker and easier to access other facilitations.
d) Temporary storage
The Customs (Import Duty) (EU Exit) Regulations 2018, sets out the temporary storage procedure that defers the declaration process and liability to import duty and VAT for up to 90 days on the goods arriving into the UK. When goods are imported into the UK they must be presented to HMRC to verify if they are domestic or chargeable goods.
If the goods are domestic goods then no further action is required. If the goods are chargeable then they are under HMRC control and either a temporary storage declaration or a declaration for a Customs procedure must be made. If a temporary storage declaration is made, the goods are placed into a temporary storage facility and the importer has 90 days (from the date of presentation of the goods) to make a customs declaration. Temporary storage facilities are not routinely operated by HMRC, but by businesses holding an approval to operate them.
This replicates the existing arrangements for imports from non-EU countries but, following exit from the EU, HMRC anticipates an increase in the volume of goods that will be placed into a temporary storage facility, as goods imported from the EU will be subject to customs control.
While there will be a cost if businesses choose to use a temporary storage facility HMRC does not predict that this will be a significant cost. Businesses will only make that business decision if there are commercial benefits gained in deferring the submission of a customs declaration by up to 90 days.