Taxation (Cross-border Trade) Bill (First sitting)

Kirsty Blackman Excerpts

Tuesday 23rd January 2018 Public Bill Committees

[Chris Davies]

Q Do you not think there is enough flexibility in the Bill already?

William Bain: It is a very flexible Bill—it has extensive powers to make delegated legislation. It does throw up some other issues that the BRC would like to see resolved during this process. For example, to get as free a flow of goods as possible, we not only need a deal with the EU on customs arrangements, we also need it on things such as transit, security, haulage and particularly VAT.

One of our concerns is that the way the Bill is drafted at the moment throws up some issues about doing business in the future. For example, companies may have to register in every EU member state in which they provide services and in many member states in which they take goods to and from the UK. That is something that we would strongly urge the Committee to look at as the Bill proceeds.

Peter MacSwiney: I will stick to the system issue, if you like. I echo what Anastassia has said. The phrase “free circulation” is still in there. I do not see how that applies. Origins should be the criteria. You said it is a very flexible Bill—it is. Our members have some concerns that it allows HMRC to make it up as it goes along. That is a worry.

I am also concerned about some of the references to electronic systems and to things being delivered by a customs information paper or a public notice. At Heathrow, for instance, public notice 216 applies, which I think was written in the mid ’80s. We have been trying to rewrite it for the last 10 years probably. It suddenly popped up last year having been rewritten with no consultation and did not show any significant changes.

I have a real concern about who will be responsible for determining day-to-day processes such as the presentation of goods, which the Bill mentions—what is that? It cannot be the physical presentation in the post-Brexit world, because there will be too much of it, so the inventory systems have the concept of presentation against an electronic record. Those things really need to be thought out.

[Kirsty Blackman (Aberdeen North) (SNP)]

Q Around the VAT issue, do you have concerns about moving from acquisition to import VAT? What do you think could be put in place to mitigate the issues that you see coming?

William Bain: Yes, that is a huge concern because companies will have a big cash flow hit. The movement of goods within the European Union has been treated as VAT-free up to now. If the UK is treated as a third country afterwards, companies ostensibly will face an up-front cash payment. There are policies—domestic and in terms of the negotiations—that could mitigate that. The Government could introduce a deferment scheme, as is the case in Spain. They could look at other domestic policies to tackle it. More fundamentally, they could look at a form of self-assessment for VAT, which would obviate the need for up-front payments.

Some international solutions could be looked at. As I pointed out earlier, whatever happens domestically, UK companies will still face the burden of having to register for VAT purposes in each member state where they offer services and in most member states where they provide goods. That requires an international solution such as staying in the EU VAT area—even though that might involve treaty change—the establishment of a new common VAT area, or some other strong VAT co-operation. The domestic element and the negotiation element are both required to sort the problem out in the round.

Anastassia Beliakova: VAT and future potential VAT cash flow issues are a serious concern for our members. To echo the points already made, international measures that are not contingent on negotiations could be adopted. Deferment schemes are one. There are already deferment schemes in the UK, but they could be more generous. For instance, they ask businesses to provide bank guarantees, which is yet another cash flow issue for businesses. Some companies can waive it, but only after they have had a clean record of VAT payments for three years, which not all SMEs, for instance, could provide.

Another potential solution is to consider postponed accounting, which in effect is what we already have as members of the EU VAT area. The Government could consider setting out policy that would introduce postponed VAT accounting for imports from all third countries. That would alleviate future concerns in relation to Brexit and simplify existing procedures quite significantly.

Peter MacSwiney: The Joint Customs Consultative Committee has requested a return to postponed accounting; that is not popular with the Treasury, of course.

[Kirsty Blackman]

Q A couple more questions. On the division between primary and delegated legislation in the Bill, are you happy with how much is being done with secondary legislation or do you feel that the balance is not right?

William Bain: We are less concerned with the process than with the outcomes. The reality is that we need an operational statute book on 30 March 2019. As I say, some issues not dealt with in the Bill are very relevant to the process of getting goods in and out of the country and to the customs process in the round. We would appreciate some further treatment of those issues, such as haulage permits or what you do with people driving trucks into the country, who need permission to move from Belgium into the UK. Some issues that we think are important in the customs process could be addressed by the Bill.

Peter MacSwiney: The JCCC was keen that the legislation should reflect how business actually works. That was why we requested some input into the primary legislation, which was refused. The problem you have potentially is the interpretation of the law. You have two options: if the law categorically states, “You can do this”, that is fine—but if the law does not categorically state that you cannot do it, can you still do it? Those may sound like very similar points of view, but actually they are not. It depends very much on the interpretation of the authorities as to how much flexibility they will allow trade. There could be a clearer guide on the facilitative, rather than being prescriptive of the letter of the law.

[Kirsty Blackman]

Q Finally, given the information that you have had from the Government and this Bill, do you feel that businesses are adequately prepared for what will happen in March 2019?

Anastassia Beliakova: The Bill, as has already been said, is very facilitative of all possible future options. Because none of them seem to have been narrowed down at the moment, it is very difficult for businesses to prepare. There is the working assumption that imports VAT is something that they will have to deal with once we leave the EU VAT area, but again that has not been fully clarified. Hence, with this kind of situation, businesses are still waiting for further clarity.

Gordon Tutt: On a technical level, when it comes to having the legislation and the systems ready, the time period to take on not only the technical changes but the additional volume and participants that may be required is very challenging. We should learn a lesson from the implementation of the UCC, which was introduced without very much thought about how it could be introduced within the timescale; subsequently, the concept of transitional regulation was introduced to allow trade and the member states—the customs authorities—to have time to adopt the changes. Our legislation in the UK perhaps needs to reflect better the ability to introduce transitional elements, where required, in a controlled manner.

Peter MacSwiney: Our concern, on behalf of our customers—predominantly freight forwarders—is that they are only just beginning to realise the extent of the changes. They are also just beginning to wake up to the fact that they are going to have to talk to their customers. From that point of view, I do not think they are particularly prepared at all.

William Bain: We have good lines of engagement with HMRC. We are having a meeting at the BRC with customs and tax experts from our member companies on Thursday, so we welcome that, but clearly there is only so much you can do when you do not know what the trading conditions will be the day after Brexit. We do not have clarity as yet on the transition. That is critical for business, in terms of the investment decisions being made in the first quarter of this year, and it is also about getting enough staff trained up and the IT systems changed and ready. All of those things take time, and getting the earliest possible clarity on as much of the terms of the transition as possible would be welcome—as early as possible.

[The Chair]

I would love to call Grahame Morris, but I cannot, because he has lost his voice. Anneliese will ask a question for him.

--- Later in debate ---

[Peter Dowd]

Q Just a very quick one. There are quite wide-ranging issues here today. How about the actual hard costs for your various organisations and the companies you represent of the introduction of the new processes, new liaison arrangements and new engagement processes?

Anastassia Beliakova: It would be very difficult to assess, because there are a number of factors. One is just the cost of a customs declaration. That will perhaps be more challenging for a smaller business that is trading ad hoc. If you are a large business trading at big volumes, the cost will be quite marginal for you.

But then there are other considerations. There is the time issue. Are you going to factor in any potential delays? If so, does that mean you have to provide for more warehousing facilities? Does that mean you have to keep an inventory? All those things are very difficult to quantify for a median figure, but they are things we know our members are starting to consider—some quite actively.

William Bain: If you move away from a just-in-time supply and sourcing mechanism, you have to look at stockpiling. That means you have to look at extra warehousing capacity. You have to change IT systems in terms of VAT and customs. All that comes at a cost for businesses, at a time in which we see the pressures in terms of footfall and retail spending.

Peter MacSwiney: As a software supplier, we support about 350 companies in probably 800 locations. We estimate that making the necessary changes, just to roll out our system, is going to cost in excess of £250,000 over the next two years. I do not know whether that is any help to you.

Gordon Tutt: One of the other issues is underwritten by the fact that some of the changes being introduced to the software systems would have been required anyway as part of the requirements to meet the UCC—new data set, new message types, more engagement in terms of electronic transactions. In addition, we are already working on CHIEF replacement, so the costs of that are already borne as part of the decision to replace CHIEF. As high as these costs are for some of the software suppliers and some of the trade sector, some of that cost would have already existed had we decided to remain within the EU.

[Kirsty Blackman]

Q Customs and immigration forces were put together in the Border Force. Given the Government’s political priority around immigration, do you feel that there is a resourcing issue with customs staff or do you feel that it is a structural issue and that decoupling customs and immigration would fix that?

Peter MacSwiney: I think there is a structural issue. It is the view, certainly at the airports, that freight is the poor relation where the Border Force is concerned.

Anastassia Beliakova: I would say it is both. It is very difficult to assess within the Border Force how much emphasis is given to goods checks versus checks on people. We have heard from members that it seems as if the focus has definitely shifted over the years. It is therefore an area that would require either a change of focus with more focus to goods, or more people dedicated just on goods checks, from our perspective.

[The Financial Secretary to the Treasury (Mel Stride)]

Q First, thank you very much for coming. It has been a really helpful session. I have two questions, which you have two minutes to answer; if you can give me a one-word answer for each one down the line, that would be perfect.

Would you describe HMRC’s engagement with yourselves—your own organisation, in the context of the discussions and the issues we have gone over today—as having been good, average or poor? Starting with Gordon.

Gordon Tutt: Very good.

Peter MacSwiney: I endorse that.

Anastassia Beliakova: Very good.

William Bain: Good, but we need answers on what is going to happen.

--- Later in debate ---

[Jonathan Reynolds]

Q One of the Opposition’s general concerns about a lot of the Brexit-related legislation is about the level of clarity. A lot of the concerns relate to the powers that will then go to the Executive and the future policy consequences of that. In your assessment, do you think that this Bill provides the right level of legislative scrutiny and safeguards as to what the policy intentions will be?

Sue Davies: I want to say at the start that from the perspective of Which? we focus on making sure that we get the best outcome for consumers from Brexit. We took a neutral position on the referendum, and that also applies to trade policy. Our interest in the Bill lies in making sure that it is as explicit as possible, within that, on how consumer interests will be taken into account.

In relation to what is in the Bill and what is dealt with by subsequent legislation, we want to make sure that any changes are limited to technical matters, and that anything with wider policy significance—particularly given the sensitivities of trade issues to some extent—is dealt with openly, so that we can see and weigh up its pros and cons. We feel that some aspects of the Bill need to be strengthened to make the consumer interest more explicit. There is recognition in the Bill, for example, of the need to take into account consumer interest when setting import duties. We also strongly support the inclusion of what is called the economic test in relation to trade remedies, because we want to make sure that we have a thorough understanding before we potentially raise consumer prices in order to support particular industries. There are aspects of the Bill that we think are important, but we also think that there could be greater clarity to make sure we see how the consumer impact will be assessed.

Helen Dennis: On the delegated powers issue: across the board we do have some concerns, more so with the Trade Bill and the process for agreeing future trade deals than are necessarily within this legislation. Here, we do have a lot of delegated powers around setting tariffs, establishing rules of origin. We are thinking about it from the perspective of developing countries, where in some instances there is a high dependency on the UK market and where there are products with tight margins, so changes to tariffs could make or break the livelihoods of producers. If you were to ask for a vote on every single tariff change, that would not be workable, so this is about finding the right balance in terms of moving forward.

It is a question to throw back to parliamentarians: to consider the role that parliamentarians feel they should have around parliamentary scrutiny, consideration of different tariff changes and rules of origin—the things we were discussing earlier. The Government have set out quite an ambitious vision about trade for development, for example in their trade White Paper, in which they want to use trade policies to improve access for developing countries. At the moment, however, we do not see those improvements in this legislation, because the focus is on continuity and maintaining the status quo for now, but we do not want to lose sight of future improvements and future discussions. I would say that actually, as things stand at the moment, there should probably be a process whereby Members of Parliament can call things in or request further scrutiny, but that is part of the wider discussion about trade policy going forward, including how the Houses want to be involved in that and how public consultation is built into it. It is something that needs to be thought about in tandem with the ongoing discussions about the Trade Bill, as well.

Jeremy White: I have a problem with the structure of the Bill, the consequence of which is that parliamentary scrutiny will be excessively difficult. I can illustrate that with this visual aid that I have brought in, which is a handbook that I edit. This is the regulatory framework for customs duties in the Union—the Union Customs Code—and its guidance. The UCC and its implementing provisions are about this wide, very finely typed—about 1,300 pages. The rest—this part here—is the necessary European and national guidance on the matter.

Therefore, when we think about the implementing provisions, of which we have maybe 15 or 20 pages of detail in the Bill, which are meant to be implemented by this, we know that the statutory instruments are going to be an enormous burden. The problem is that the Bill is overly ambitious. It fails to distinguish between those provisions that I will call just charges and the machinery—the regulatory framework. This book does not concern the charges, the tariff schedules, the trade instruments or the preferential agreements. They are in another book, of about the same size. I am not concerned about those, and the Bill would deal with them.

The trouble is that it brings into force the repeal of the UCC, in effect, on exit day. That being so—it is hard-wired into the Bill—its commencement provision requires there to be statutory instruments of this magnitude on exit day. The problem is that since the destruction of the Bill is a recast, they will be recast into other, English language. Such an approach might be appropriate for a no-deal arrangement with the EU, but it creates burdens of cost and risk in respect of any trading activity that follows afterwards, particularly if we have any transition period at all or are subject to obligations under the leaving treaty—I will call it the leaving treaty, but whatever it is—to preserve the regulatory framework of the UCC.

To be realistic, we cannot expect the EU to be in favour of or agree to any kind of regulatory framework that is different from the UCC. The UCC is what they have budgeted for. At the moment, it is in an implementation phase; we will probably come to that in other questions, and the problems of the timetable for its implementation now that, yesterday, the Commission has endorsed a report following the revised road map for the implementation of the UCC, which I could cover later.

The primary point then is that if we have a complete recast on exit day, anybody who is involved in trade, particularly if we have obligations to retain the same effects as the UCC, will have to be looking at both the UCC and the English implementation at the same time for every single piece of endeavour—almost every importation. As I said, the scrutiny will not just be on the basis of whether the legislation achieves its objective with respect to any changes from the UCC; it will also have to look at it on the basis of whether it preserves the effect of the UCC that was intended. That is an enormous burden, and I would say that it makes parliamentary scrutiny unnecessarily and excessively difficult.

[Kirsty Blackman]

Q The Chartered Institute of Taxation submission is particularly damning; it is quite difficult to pick out a particular issue to ask you about because it has so much about how unclear this legislation is and how many unintended consequences it might have. In terms of the members that you have, the organisations that you work with, making decisions now for what will happen in 15 months’ time, are organisations making decisions now that will have a negative impact because of the process that we are undergoing, and is there a way that this process could be made better in order, for example, to safeguard supply chains in the UK rather than moving them to Europe?

Jeremy White: That is an important point. The CIOT’s report brings out some evidence of some members having already amended their supply chains in order to cope with arrangements, because of the uncertainty. Uncertainty is a burden that trade faces at the moment, and it has to make decisions about it, so you are right. The CIOT has noticed that clients—enterprises that are members—are changing their supply chains because of the uncertainty, so anything that the Bill can do to reduce uncertainty would be good. For example, if the Bill can, by its commencement provisions, instead allow the withdrawal Bill to operate—therefore the UCC is automatically incorporated—and then exercise the powers to modify that application, that will reduce a lot of uncertainty and there will be no need to read this book—the UCC—and the English version. This book has to be read anyway, and this, and there will be a very small amount of variation where we want to improve on the UCC for the United Kingdom.

This is about uncertainty and cost, and what enterprises want to do. Everything can be resolved by law and by allocating resources to the issues, but that just increases cost, besides the parliamentary scrutiny being a burden for Parliament and for those who want to assist it—charities such as the CIOT and so on. Businesses themselves will see this as an issue of cost that it is unnecessary for them to incur.

[Kirsty Blackman]

Q In terms of the measures on developing countries, Helen, how do you feel that the Bill explores those issues? Do you feel that it adequately ensures that fair trade happens, for example, and that developing countries are given a fair deal?

Helen Dennis: There is certainly that intention in the legislation, and that is good to see. Certainly, bringing forward a UK preference scheme and guaranteeing in law the duty-free, quota-free access for the least developed countries is all very positive. It takes the best bits of current EU policy and brings them over into UK policy. What we are grappling with at the moment is those countries that do not qualify for that access, which are not LDCs but still have developing country status in some way; they may have an economic partnership agreement or a free trade agreement. We do not yet have absolute clarity and guarantees that their market access will be preserved in the same way. There is definitely a stated intention from Government, but not a guarantee.

I would say we have heard more than we have seen. Obviously, the next six months or so are going to be critical. What we have heard were potential discussions about people changing their sourcing—away from Kenya to Ethiopia, for example—in relation to cut flowers, and discussion about trading routes: things that currently come via other EU countries into the UK, whether that is flowers via the Netherlands or tea or coffee that is processed in Germany. There is lots of complexity around every commodity. I would say that at the moment there has been more hearing than seeing action, but I think the next few months will be crucial.

The challenge of one of the points that we have been trying to make with quite a short submission about this is that because we do not have an absolute guarantee at the moment that the transition of the economic partnership agreements and free trade agreements will occur in March 2019, although we know that the Government are working hard on it, we want to ensure that the preference scheme is able to accommodate additional countries that may not be listed in the schedules at the moment, as a kind of fall-back option in case we cannot transition those free trade agreements and so on over in time. Obviously, we want to avoid the cliff edge for developing countries just as we want to avoid the cliff edge for UK business.

[The Chair]

We welcome Barbara Scott to the panel. Barbara, would you like to introduce yourself?

Barbara Scott: My apologies for the Metropolitan line this morning. I am the director of Customs Associates. I am an independent customs consultant and have been for many years, advising businesses on importing and exporting, currently for trade outside the Union.

--- Later in debate ---

[Nic Dakin]

Q There are four tests here—four different checks. That seems to me to be potentially over-checking. There needs to be a test, but do there need to be four tests?

Sue Davies: We have the economic significance of affected industries and consumers and the likely impact on affected industries and consumers, which enable a wider public policy consideration. For example, there have been remedies in everything from salmon to solar panels in the past. We have got the likely impact on particular geographical areas, which is about regional aspects, and the likely consequences on the competitive environment. So there is a wider competition check, and that is where it will be important to make sure that the Competition and Markets Authority is consulted.

We think the criteria are right. It is how it is done. At the moment it says, “They can take account of the following so far as relevant,” whereas we think it is really important that there is a transparent impact assessment, so we think the wording there could be clearer about how it is doing that modelling in assessing the impact. We felt that the criteria seemed sensible.

Barbara Scott: What also needs to be in there is perhaps timings. At the moment, when we have trade remedies under the EU legislation, it takes an inordinate amount of time to put them in place. If we can have something in our legislation that is timeframed and more clear, with a shorter timeframe, that will be a big plus.

[Kirsty Blackman]

Q My question is specifically for Barbara Scott on the issue of HMRC resourcing. Is the authorised economic operator system working as it should, and will it work post Brexit? Is there enough focus within Border Force on customs issues, or does that need to change as well?

Barbara Scott: Currently, we have a bit of a divide between HMRC and Customs and how it operates processes such as economic operators, which Border Force does not come online with. No matter what we do to facilitate authorised economic operators—I detest that term—Border Force will still carry out the same controls whether a trade is authorised or not authorised. That really is something that discourages businesses from actually becoming an AEO.

There is a lot of talk about our not having a high number of AEOs in this country. That is because UK Customs has looked at trade facilitation as far as it can, and was quite facilitative to business before we even had an AEO system. For larger traders, there was a lot of facilitation allowed, whereas perhaps some other EU countries, particularly before the UCC, were not so facilitative and have used that AEO process to be more facilitative, which is why traders in, say, Germany have become authorised and in the UK they have not.

The benefits of AEO currently are very small, which is why I was pleased to see within this Bill that there are opportunities for having different levels of AEO. That could be a particular help to small businesses that cannot get over the extremely high bar that exists at the moment. Something that is smaller—a sort of bronze star for SMEs—might be better than the gold star that a multimillion-pound business can afford to obtain.

[Mel Stride]

Q Thank you all for your evidence today, which has been really helpful. I have a specific question for Mr White regarding his assertion, which I generally agree with, that the simplest way forward would be to effectively take the UCC on board, but modify it as required. Is there anything in the Bill that would prevent us from doing that? If your thought is that we should be required to do it, given that we might not be prevented from doing it by the Bill, would bringing it into the Bill not just risk us tying our hands in a way that would be unhelpful, given that we do not know exactly where the negotiations are going to land in that respect?

Jeremy White: Technically, I think you would be safe if you amended the commencement provision. At the moment, the way that it operates on exit day is that the repeal in schedule 7 of the taxation Bill automatically repeals the effect of the withdrawal Bill, which would otherwise preserve the UCC as retained EU direct legislation. You would have to effect the taxation commencement provision. That would have to be amended, so that on exit day it no longer immediately repealed the UCC. Then the withdrawal Bill would operate.

Clearly, we would identify some modifications that are required, some deficiencies, and we would have power under regulations, under the withdrawal Bill, to make regulations amending an unnecessary effect or remedying a deficiency. There would also be power under regulations under the taxation Act itself to make regulations. Those regulations would have to be enforced on exit day.