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UK government opens possibility that Brexit transition arrangements will last longer than two years, says expert

The Treasury has hinted at the possibility of interim trade arrangements applying between the UK and EU for more than two years while all the conditions of post-Brexit trade are put in place, an expert has said.11 Oct 2017

A new white paper on legislating for the UK’s future customs, VAT and excise regimes (38-page / 401KB PDF) highlighted UK chancellor Philip Hammond's view that an agreement between the UK and EU on "an interim implementation period" would "allow businesses both in the UK and the EU time to adjust to exit in a smooth and orderly way".

Hammond said that "'cliff-edge’ changes are in the interests of no-one, either here or in the EU". However, the paper explained that new UK customs legislation would provide for an eventuality where no deal is agreed between the UK and EU on the terms of future trade post-Brexit.

"Whatever the outcome of the negotiations, the UK will need to make changes to the cross-border rules for the VAT and excise regimes, following the UK’s exit from the EU," the paper said. "New domestic legislation is due to enter parliament later this autumn which will provide for most negotiated outcomes, as well as a contingency scenario. This Bill will be referred to in this paper as the ‘Customs Bill’."

"In addition to providing for most negotiated outcomes, the Customs Bill will give the government the ability to operate a standalone customs regime and ensure that VAT and excise legislation operates effectively, if the UK were to leave the EU without a negotiated settlement. Leaving the EU without a negotiated settlement is not the government’s preferred outcome, but it is essential that the UK is prepared for all possible outcomes on customs, VAT and excise arrangements," it said.

Guy Lougher of Pinsent Masons, the law firm behind Out-Law.com, said: "The paper highlights well the significant challenges that will result from the task of implementing a new customs regime in the UK. It will be an extremely large and complex task that will need a lengthy implementation, or transition, phase."

"The paper does not however discuss in detail the further challenging question of how to address the Northern Ireland-Ireland border, which involves one of the three key filter issues specified by the European Commission before progress can occur on the future EU/UK trade deal. This remains a key, and very difficult, issue for the government and the EU negotiators to resolve," he said.

"The paper also explores the possibility of an ‘interim implementation’ period which could be time-limited and ‘delivered through a continued close association with the EU Customs Union’ after the UK leaves the EU. Crucially, no time limit is specified and the length of the period is tied only to 'the speed at which the implementation of new arrangements could take place', leaving open the possibility of an extended implementation period beyond two years," Lougher said.

At the moment, the UK, as an EU member state, participates in the EU Customs Union. It means, among other things, that goods moving between the UK and other EU countries are not subject to routine customs controls, duty or quotas. Customs laws stem from EU legislation. The white paper explained what provisions a new UK Customs Bill will contain to replace the existing framework after Brexit.

"The Bill will allow the government to create a standalone customs regime by ensuring that, among other things: the UK can charge customs duty on goods (including on goods imported from the EU); the UK can define how goods will be classified to establish the amount of customs duty due (known as the nomenclature); the UK can set and vary rates of customs duty, specify where goods are subject to quotas and where goods are relieved from duty; the UK can determine the additional territories forming part of a customs union with the UK," the paper said.

The Bill will also provide the UK government with powers to "vary or suspend duty at import in certain circumstances" and enable HMRC to "request and collect tax-related information from declarants and store and share it as appropriate". It will also allow for a new UK tariff regime to be established, it said.

The new legislation will, among other things, also be framed so that there is flexibility for the UK government to "give effect to an agreement with the EU on supplies or movements in progress on the day of EU exit and enable supplies or movements of goods and services by businesses and individuals to continue as freely as possible thereafter" and to "deal with VAT on movements of goods and services between the UK and EU", it said.

The Treasury said one option being explored, which would "minimise … additional requirements as far as possible" on businesses, is a "highly streamlined customs arrangement" between the UK and the EU.

A second option that could be developed is a new UK-EU customs partnership, it said.

"One potential approach the UK intends to explore further with the EU would involve the UK acting in partnership with the EU to operate a regime for imports that aligns precisely with the EU’s external customs border, for goods that will be consumed in the EU market, even if they are part of a supply chain in the UK first," the Treasury said. "The UK would need to apply the same tariffs as the EU, and provide the same treatment for rules of origin for those goods arriving in the UK and destined for the EU."