Inquiry highlights small business failings of key Brexit customs options

The two customs options open to Britain's small business remain fraught with challenges according to a new Brexit inquiry.

Brexit: the customs challenge by the House of Lords EU External Affairs Sub-Committee highlights the difficulties facing prime minister May's preferred Facilitated Customs Arrangement (FCA) option and the cost placed on small businesses in the two likely scenarios.

The EU accounts for 49% of UK exports. The government's trying to ensure "the most frictionless trade possible" while staying outside of the EU's customs union and Single Market - the two mechanisms designed to facilitate exactly this.

The inquiry considers two Brexit scenarios:

1. Facilitated Customs Arrangement (FCA): Aims to secure the advantages of the customs union while developing an independent trade policy

2. Customs processes under a no deal scenario

The low-cost option could be expensive for SMEs

The FCA aims to remove the need for customs checks. Tariffs would be levied based on whether goods from non-EU countries are destined for the UK or the EU.

Costs are difficult to estimate because it's not clear how goods would be tracked. However, HMRC expects the FCA to create £700 million in administration costs a year, considerably less than the no deal scenario.

The requirements would be particularly difficult for small businesses to navigate.

"They have no one who actually understands customs now," said Susan Morley from Morley Consulting in evidence. "They rely on agents and freight agents. In contrast, big car manufacturers, for instance, probably have a department of customs specialists who can be on top of it."

There's also a big question mark over the EU's acceptance of the FCA approach. May's proposing the UK has the advantages of the customs union while negotiating better trade deals. Why would the EU allow the UK to be in a better position than member states?

No deal: Brexit customs options

The government has limited options to mitigate the disruption of trade in a no deal Brexit. Keeping trade moving, ensuring border security and collection of revenue would be difficult, according to the inquiry. HMRC expects a no deal Brexit to cost UK traders £18bn.

No deal would put EU exports on World Trade Organization terms, creating tariff and administration costs for small businesses. The inquiry said there are 245,000 businesses that only trade with the EU and have no expertise in customs procedures.

Border checks would introduce delays and lead to congestion at borders. This poses a significant challenge to just-in-time manufacturing and agricultural businesses.

"Roll-on/roll-off ports process the majority of trade in goods between the UK and the EU. The introduction of new customs checks at the border under 'no deal' would cause delays at these ports, thus disrupting highly integrated supply chains," says the inquiry.

Animal products will be particularly difficult.

"Every product of animal origin has to enter the EU via a veterinary border inspection post. Calais is not a veterinary border inspection post. The Eurotunnel is not a veterinary border inspection post. The closest is Dunkirk, which has a low capacity for physical inspections," said the Centre for European Reform Research Fellow Sam Lowe.

Getting Authorised Economic Operator status

The FCA will create a substantial amount of administrative work. Authorised Economic Operator (AEO) or trusted trader status provide a potential route to compliance. These signify businesses have the correct processes in place to avoid fraud.

AEO requires a three-year export audit trail and takes about eight months to complete, according to the Global Counsel.

Advanced Supply Chain helps companies like Matalan, Asda and DFS transport goods. Chief executive Mike Danby recently told Enterprise Nation the process costs about £100,000.

"I've seen Brexiteers say that even companies employing five people can get AEO status. This is just not viable.

"It took us a whole year to get the accreditation and that was employing an expensive consultant to manage the whole process full-time. The reality is that most small businesses do not have the time and resource to do that," he says.

The inquiry recommends having tiers of AEO status including "one that is easy to obtain for SMEs".

Current take-up is low, with 638 UK businesses currently registered.

Do we have time to make a deal?

The complexity of the customs arrangements makes it difficult to finalise plans in the remaining six months.

"The uncertainty over whether there will be a negotiated agreement between the two sides hinders both UK and EU businesses in their preparations for Brexit. It also adversely affects the ability of UK and EU customs authorities to plan for possible changes," says the inquiry.

The inquiry implores the government to make its plans clearer.

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