Brexit headache for HMRC

    The Public Accounts Committee (PAC) is becoming increasingly anxious about how HMRC is going to manage customs arrangements post Brexit and has expressed concern about the potential for lorry queues and food rotting at Dover.

    Some sobering statistics highlight the challenge faced by HMRC.

    In 2015 around 55 million customs declarations were made by 141,000 traders. When the UK leaves the European Union in March 2019, the number of declarations is expected to rise five-fold to 255 million each year.

    HMRC is building a new customs system called the Customs Declaration Service (CDS) to replace the existing Customs Handling of Import and Export Freight (CHIEF) system and is confident the programme is on track, ready to be fully operational by January 2019.

    Acknowledging the deadline is very tight and there are major risks to CDS, HMRC has been trying to extract £7.3m of additional funding from the Treasury to fund an upgrade of CHIEF as a contingency measure, but has met with little success so far.

    With an expressive mix of frustration and determination Jon Thompson, the Permanent Secretary of HMRC, told the PAC on 20 November: "Just to be really clear, it is going to happen and I am going to spend the money, whether I get the funding or not."

    Meg Hillier MP, the Chair of the PAC, appreciated Mr Thompson’s boldness and commented he had set a challenge for the Chancellor.

    The risks

    HMRC has highlighted four significant risks to the CDS programme:
     
    1. The integration of eight components making up CDS is unsuccessful.
    2. Testing reveals that CDS cannot handle the projected number of declarations.
    3. Problems emerge with the migration of users and data from CHIEF to CDS.
    4. User readiness.

    Funding of £157m is currently in place to provide the capacity to handle 150 million customs declarations each year. HMRC does not yet know how much more money it will need to increase the capacity up to the anticipated level of 255 million. CHIEF is designed to handle a maximum annual volume of 100 million transactions.
     
    Trader engagement

    Of the 141,000 traders who currently use CHIEF, only 604 of them are regarded as ‘trusted traders’ by HMRC with ‘Authorised Economic Operator’ (AEO) status. This compares with 6,000 in Germany.

    Traders with AEO status can clear their goods more quickly at the border and the PAC is keen to see HMRC engage with traders and begin promoting AEO status more widely. HMRC has agreed it is a good idea, but has told the PAC it will only begin engaging with potential AEO traders when the future of the UK’s customs system is clear.

    Recommendations

    The PAC has made a series of recommendations to HMRC which include:
     
    • Communicating with traders so they are informed of the CDS timeline and progress by January 2018.
    • Ensuring the CDS system and the CHIEF back up option have the capability to handle 255 million customs declarations each year, as well as the flexibility to cope with changes to tariffs, Free Trade Agreements and international trade quotas.

    The Treasury has also been called upon to release the funding required to meet the capacity challenges.

    Prioritising the priorities

    HMRC is already in the middle of substantial transformation, reducing the tax office network down to 13 regional hubs and with more than 250 projects on the go.

    Jon Thompson has commented, "I do not believe it is possible to take 250 existing programmes of change and simply add Brexit on." Between Christmas and the end of the financial year, HMRC intends to carry out a full re-prioritisation, with Thompson pre-emptively stating the CDS will remain a top priority, alongside revenue generating projects.

    For further information, please contact the author of this article, our Head of Technical Research, Guy Smith.