Brexit - Preparing the Freight Market for 1 January 2021
The end of the Brexit transition period is approaching fast. For the freight ecosystem, if you want to be ready to do business in Europe from 1 January 2020, there are a number of undefined areas that make it challenging to say that you are fully prepared for the UK leaving the European Single Market and the EU Customs Union.
To recap, the UK Government has set out its objectives for Brexit: the UK will leave the jurisdiction of the European Court of Justice, control immigration from the European Union (EU), and pursue an independent trade policy.
There will be significant changes to the way the UK border operates the Irish land border or ports, and airports around the country. This is regardless of whether the UK continues as a member of the Single Market, creates a new customs union, or signs a ‘deep and comprehensive’ Free Trade Agreement (FTA).
Traders who are used to moving goods freely to the EU will need to adapt. There will be new requirements for paperwork and goods could face significant checks at the EU border.
Supply chains that are optimised for speed and fluidity will need to find the space and time for customs authorities to carry out checks and inspections.
International agreements mean that there are certain requirements that the UK must meet at its border; there is no option of simply deciding to give EU goods preferential treatment without a deal between the two. That also makes a trade deal critical to managing the specific set of challenges faced at the Irish border, and currently leaves the freight community with many unknowns in the lead up to 1 January.
Whether an import/export business, a freight forwarder, or a vessel operating company, you need to be clear on your role in your wider supply chain to take into consideration:
Border The introduction of border checks between the UK and the EU could happen overnight.
Customs Customs declarations are going to be a new world for many who have traded with Europe alone in the past. On the day of exit from the EU, the UK authorities will need to perform new functions or face disruption at the border.
Document Checks There will be new document checks and fiscal requirements for customs, in addition to a number of other key activities that regulate goods crossing borders.
Negotiations are still ongoing over whether there will be a free trade deal. However, with progress on a UK-EU post-Brexit FTA still wavering, it is looking increasingly likely that the UK’s transition period out of the EU trading structure after 31 December 2020 could meet a hard Brexit.
What if no UK-EU Free Trade Agreement deal is concluded?
An FTA deal could limit disruptors such as tariffs, quotas, data exchange restrictions, recognition of transport regulations and licenses and more.
In the case of ‘no trade deal’, the table below summarises what the effects would be on goods imports and transportation.
Effect of 'No Trade Deal'
Tariffs and quotas
Without a deal, tariffs and import quotas will apply, making trade more expensive and restricted in sensitive sectors. The UK’s Global Tariff has set levies on global imports, including from the EU from 2021. But the EU would be obliged to follow its Common Customs Tariff under the World Trade Organisation most favoured nation rules. This would include 10% tariffs on cars and 11% on agriculture coming from the UK.
UK businesses will lose many VAT compliance simplifications as the UK leaves the EU VAT regime. This will require extra VAT registrations for UK companies, and the payment of import VAT on goods coming into the UK or EU for the first time. The UK has committed to introducing a VAT postponed accounting system. UK traders will also need a VAT Fiscal Representative in up to 19 of the EU27 member states. Northern Ireland Brexit VAT rules are different.
Rules of origin
To qualify for any negotiated reduced tariffs, traders would have to prove the origin of their goods going into the UK or EU. This prevents goods being rerouted from third countries to avoid tariffs. Complying with the rules of origin could add up to 15% to costs. If there is no-deal, then full tariffs apply anyway.
With or without an FTA, full customs declarations will be required at UK and EU ports. The UK will defer customs declarations until 1 July 2021. However, an FTA is looking to recognise simplifications such as the Authorised Economic Operator schemes. There will be free Northern Ireland customs declarations help for UK businesses sending goods from GB.
Safety and security declarations
Irrespective of any FTA, shippers will need to complete full declarations of consignments in advance. The UK will waive these on EU to GB movements until 1 July 2021. But they will be required for UK to EU and GB to NI. Businesses will be required to prepare for safety and security declarations in all scenarios.
Regulator controls agriculture, chemicals and industrials
Full regulatory controls will apply on imports to the UK or EU. The only easement an FTA would offer is a reduction in the number of shipments checked with some mutual recognition of standards.
UK or EU road hauliers would no longer be recognised in each territory and would not be automatically allowed to ship goods. There may be some limited quota-restricted numbers allowed. Driving licences rights would also be restricted. In the 2019 Brexit planning, both sides did make some no-deal compromises which could be repeated if no-trade deal happens. An FTA would seek to allow bilateral access to freight drivers and carriers.
There would be limited rights granted in a no-FTA situation under international agreements. But there would be problems for intra-EU or UK services from airlines or air hauliers. The EU aviation safety system would no longer apply to the UK, as well as EU agreements with many other countries. In the run-up to 2019 no-deal Brexit, the UK and EU did agree to a temporary continuation of agreements to avoid disorder.
Operators of services between the UK and EU would need licenses on both sides to continue. The UK has said it would hold over for 12 months the continuing recognition of EU licenses.
With the final terms of the proposed comprehensive free trade agreement between the UK and the EU remain to be finalised, clearly, there will be numerous challenges ahead for the freight ecosystem. Companies doing business in the UK and Europe can continue to keep up-to-date with the information published by the UK Government.
Key Factors for Successful Preparations for Trading with Europe after 1 January 2021
The following key factors for successful preparations for trading with Europe after 1 January 2021 are based on select excerpts of the 28 October Lloyd’s List webinar ‘Brexit and Beyond: Preparing the Freight Market for 2021’.
Do I need an Economic Operator Registration Identification (EORI) Number?
If you move goods to or from the EU, you will need an EORI number. An EORI number is crucial, without one, you cannot commence import or customs clearance.
In September 2019, the UK Government auto-enrolled every VAT registered business with an EROI number. Businesses established after that date, and non-VAT registered businesses (now looking to commence trade with the EU) will not have an EORI number.
It is important to recognise if you have an EORI number today, it is currently an ‘EU’ number. From the 1 January 2021, it will be a ‘GB’ number, or if from Northern Ireland, it will be a ‘NI’ number.
If you do not have an EORI number, are a new business (since September 2019), or a non-VAT registered business, you need to apply for one. It is a relatively simple procedure, which can be done online through the HM Revenue & Customs (HMRC).
Will I require two numbers if I am declaring in the EU?
Yes, you will, if effectively selling under ‘Incoterms’ Delivered Duty Paid (DDP). You will be responsible for the inbound declaration in the European Union.
What should I expect with Customs Clearance?
The key focus is on what type of trade deal will be negotiated. Without a free trade agreement, there will be a requirement for full customs declarations at UK and EU ports. For numerous traders and companies who have only ever dealt with the European Union (EU) before, customs declarations will be a new area for them.
On the day of exit from the EU, the UK authorities will need to perform new functions or face disruption at the border. There will be new document checks and fiscal requirements (the
primary focus of the UK Government’s view of customs), and also a number of other key
activities that regulate goods crossing borders.
Until a trade deal is agreed, the details will not be clear.
Should I use a customs broker or manage customs declarations in-house?
For traders who will need to make customs declarations for the first time after exit they will need to manage increased administration and incur the cost of doing so.
There will be a requirement for goods exported to Europe to submit safety and security declarations as well as customs declarations. The UK Government has done some work towards relaxing that and has indicated a ‘deferral process’ until July 2021 before it will enforce these checks.
However, the UK’s information and communications technology (ICT) infrastructure system, Customs Handling of Import and Export Freight (CHIEF), responsible for managing import and export and critical to the running of the border system, continues to pose challenges as it’s still in the process of being replaced by the Customs Declaration Services (CDS) system.
If you are anticipating to complete customs declarations in-house, business leaders need to familiarise themselves with the basics of the new system and make sure they are clear on the timeline for its introduction, so as to ensure they are ready for the changes as they occur.
CHIEF and CDS are the key customs systems in the UK, but are just two of around 57 in the wider customs landscape (across both government and the private sector) that make up HMRC’s border ICT. All businesses that import and export goods from and to the UK need to get ready for CDS and be prepared.
There are still a number of changes being implemented in the system that traders will need to use on customs filings, and often forgotten security filings. It is one thing if you have the software, but you need to know what you are declaring. The person submitting a customs declaration is legally and financially liable for the information.
If going externally to a customs broker, there are concerns about capacity in the brokerage market. If traders go the broker route, then clearly the extension of data and information is key and sharing as much information digitally, so customs brokers can get data into their system to avoid as much manual handling as possible.
Do I still need full access to the Customs Handling of Import and Export Freight (CHIEF) system?
At present, until everyone has migrated to CDS (still being rolled out), CHIEF has to be used, including in Northern Ireland, which is adding pressure in the roll out.
For Customs Freight Simplified Procedures (CSFP) declarations, you still require access to CHIEF today, CDS in the future. You can use a number of different routes into CHIEF via a CDS or direct for supplementary declarations. But if you want to do the first step of CSFP (customs freight simplified procedures), you do have to go through a port community system.
What software do I need to use for Customs Freight Simplified Procedures (CSFP) declarations?
Any software that can do CSFP declarations, supplementary declarations can fulfil this requirement. Some traders only do supplementary declarations. For frontier clearance they use a broker for simplified frontier declaration. For guidance on simplified declarations for imports, see HMRC.
Are there capacity issues with the availability of customs and other resources at the moment?
For customs inspectors for physical inspection, there is the practicality of how resources are being used. It is a shared team that sits across ports, and we are all aware of the stories of vast shortages of customs staff.
It is unclear how much resource is actually available at the moment and what the availability will be after exit, although there have been reassurances on both sides that capacity is being ramped up to take into account the extra volumes.
If the UK Government negotiates a trade deal that respects reciprocal standards. Then the number of customs inspectors that will be needed will be far lower, than if the UK is exiting on a ‘no deal’ basis.
Even if the UK’s border is ready for Brexit, issues in Calais, Rotterdam or other European ports could cause significant disruption for British exporters and supply chains. There are two sides to the border. Moving goods from A to B involves interactions with multiple actors, modes of transport and technology systems. Which also brings to the forefront how the EU will adapt and prepare to apply customs rules by 1 January.
How will capacity affect driver availability within UK supply chains?
With no clarity on the type of trade deal, there are differing perspectives on resources for drivers and licencing.
In terms of the availability of drivers for cargo, the UK Government have said it will allow European drivers into the UK under their UK licences / haulage. But if cabotage is not permitted within the UK market for European drivers, we will see a consequential impact on driver availability within UK supply chains.
This is not just on the international flow of goods, but also for European drivers who will often fill a load locally (e.g. Manchester to London) on the way back to Europe. But if cabotage is not permitted, or in the deal to facilitate it, we will see an impact on the driver community beyond just providing transport from the EU countries and the UK. The number of drivers will get smaller and smaller. And capacity issues that will be driven by this go far beyond the simple application of border protocols for EU trade.
Is close proximity to market important to your supply chain?
With the possible shortage of drivers, people may look at reducing supply chain, or go to different ports and consider different transport modes: sea freight, road freight and unaccompanied cargo.
It is expected that we will see an increase in unaccompanied freight or unitised / containerised freight in both directions, and participants very open to short supply chains coming through the English Channel, with the possible shortage of drivers.
Will this change the way traders ship their goods both in and out?
In 2020 we have all seen the far-reaching challenges the Covid-19 pandemic has had on hauliers and the availability of haulage. The switch to longer distance sea routes and shorter distance road routes is already happening.
However, depending on your supply chain, this scenario may not be suitable to all. The great benefit of a haulage company is its speed, and for those supply chains that need rapid support, that model will continue.
But for those more interested in reliable supply chains, we are seeing evidence of switching to longer distance sea routes to take advantage of time received for customs clearance.
Understanding your supply chain is important, and routing cargo through different channels that are likely to be less congested, or less exposed to some of those issues that might be presented at other locations makes close proximity to market of interest.
What delays can be expected at ports / borders in terms of customs clearance?
Numerous. For example, if you work on the assumption of one third of companies not being fully prepared for customs clearance come 1 January. Then every port that handles 1,000 units per day, means 300+ units are not going to be ready.
If there is one truck that has an issue, or one pallet in a load that has an issue, through no fault of your own, it could hold up your delivery or consignment.
It is not just about each piece or little bit of the supply chain being ready, but the consequences and disruption to supply chains of one bit or two bits of it going wrong.
What is the Northern Ireland protocol?
Under an arrangement known as the Northern Ireland protocol, one of the solutions in the treaty was to keep Northern Ireland in the EU single market for goods, unlike the rest of the United Kingdom. This will make checks on goods travelling from Northern Ireland (a non-EU country) into the Republic of Ireland (an EU country) unnecessary.
The aim is to avoid the return of a ‘hard’ land border between Northern Ireland, in the UK, and the Republic of Ireland, in the EU. The border is a sensitive issue because of the history of Northern Ireland and the agreements made to bring peace. All sides (UK and EU) agreed they did not want the return of border checks - or other physical infrastructure - that could become a target.
The way these measures will be implemented on the ground is still being negotiated by UK and EU officials. If they cannot reach agreement by the end of the transition period, on 31 December 2020, and there is no free-trade deal, that is when parts of this legislation could come into play.
However, the controversy around the 9 November review of the Internal Market Bill (see below) would give UK ministers power to interpret what that means (in terms of the NI protocol), which has not helped with mutual trust between the UK Government and the EU.
What are the implications of the UK House of Lord’s review of the UK’s Internal Market Bill on 9 November?
The UK’s Internal Market Bill contains measures that overrule parts of the UK’s Brexit agreement signed with the EU last year. It was reviewed in the UK House of Lords on 9 November. Members voted by 433 to 165 to remove Clause 42 which included provisions on the Northern Ireland Protocol. The House of Lords also voted to remove Clause 44 which would override parts of the Brexit withdrawal agreement relating to Northern Ireland, by 407 to 148.
Many senior Conservatives voted against the UK Government’s controversial Internal Market Bill which gives it power to change aspects of the EU withdrawal agreement, a legally binding deal governing the terms of Brexit made earlier this year.
Giving ministers power to interpret what the bill means is widely viewed as putting the UK in breach of the international treaty it signed last year, and this should not be done in accordance with the case law of the European Court of Justice.
On one hand, the UK government says it is just seeking to clarify the terms of the Northern Ireland protocol, to avoid disruption. On the other hand, the EU says it is trying to change parts of the recently agreed international treaty unilaterally, and President-elect Biden appears to agree.
UK Members of Parliament are unlikely to discuss the legislation again until December, at which time they have indicated that the same clauses will be reinstated when the legislation returns to the House of Commons. However, by that point it should be clearer whether a post-Brexit free trade deal can be struck.
What is the UK Internal Market Bill?
The Internal Market Bill (passed on 9 September) is designed to enable goods and services to flow freely across England, Scotland, Wales, and Northern Ireland after 1 January, when the post-Brexit transition period runs out.
UK Ministers say the clauses in the bill provide a crucial safety net and said it had a duty to ensure that Northern Ireland’s businesses and producers continued to have unfettered access to the UK in case the EU interprets the agreement, in particular the section on Northern Ireland (known as the protocol) in an ‘extreme and unreasonable’ way.
For example, the protocol states companies moving goods from Northern Ireland to Great Britain (England, Scotland, and Wales) would have to fill out export declaration forms. But the Internal Market Bill would give ministers the right to overrule or ignore this part of EU customs law.
There are consequences about the impact of the bill on the rule of law, and the bill continues to be widely criticised by the EU.
As the clock continues to tick towards the end of the transition period, there is still very little clarity on whether a trade deal will be signed, and the customs procedures to be adopted by 1 January are still very much open for discussion. The concern for capacity issues through the industry are real.
For traders who are still in the process of, or haven’t put anything in place by now, there will be significant challenges in terms of the minimum that can be done to ensure goods can move (EORI numbers and getting systems into place).
With so many unknowns, businesses based in or trading with the UK have many significant changes to prepare for as the full legal and regulatory implications of Britain’s departure from the European Union gradually reveal themselves.
For more information, please contact Richard Kamppari Baker.
This article was first published in its entirety by World Insurance.