HMRC’s race against the clock to have customs tax tech in place for Brexit day

SUMMARY:

Day one of life after Brexit and the UK might not have the tech in place to collect billions in customs tax. Dire warnings from the National Audit Office.

The UK risks not having an upgraded customs system in place to collect over £34 billion in trading taxes when Brexit takes place, according to warnings from the National Audit Office (NAO).

The current 20 year old customs system, known as CHIEF (Customs Handling of Import and Export Freight), is being replaced following changes to European Union legislation which would be problematic to manage using the ageing technology in place.

The new Customs Declaration Service (CDS) is one of 15 major programmes in HMRC’s (Her Majesty’s Revenue and Customs) wider transformation portfolio. It will use commercially available software from IBM and European Dynamics to manage customs declarations and calculate tariffs.

HMRC started the programme before the UK voted to leave the EU in June 2016, and before the government committed to seeking a new customs arrangement from March 2019.

The new system was originally intended to be in place this year, but as well as the Brexit vote, the implementation was delayed by HMRC deciding to change the system’s main database, choosing a database that was consistent with HMRC’s strategic direction to consolidate databases onto a single technology. It also dropped its first choice of software supplier amid security concerns.

Having a robust working system in place is essential to the UK economy. CHIEF collects around £34 billion in tax and duty on imports from countries outside the EU each year. In 2015-16, it processed around 55 million import and export customs declarations. In 2015 nearly £700 billion of goods crossed the border.

But there is, says the NAO, a significant amount of work to complete and consequent risk that HMRC will not have the full functionality and scope of CDS in place by March 2019 when the UK plans to leave the EU. So some tough choices need to be made, says Amyas Morse, head of the NAO:

Customs problems have obvious implications for the flow of goods in and out of the UK, so Government as a whole needs to decide whether the extra cost and effort of getting a working system in place for day one is an insurance premium worth paying.

Customs barriers

The technical challenge of integrating the different elements of the CDS system is a particular concern:

HMRC has chosen commercially available software for the management of customs declarations and the calculation of tariffs, which need to be integrated with its existing technology estate. System integration on this scale often raises unexpected issues and the window for testing can become highly pressured. HMRC has already identified issues with how the new software communicates and integrates with other parts of HMRC’s technology. It could identify more issues as it continues to integrate these systems.

There’s also the issue of having essentially to work ‘in the dark’ as no firm arrangements have been put in place for customs arrangements post-Brexit. The NAO notes:

One factor under negotiation is a new customs arrangement. Until UK/EU customs negotiations are complete, the programme is operating with some uncertainty, which increases the risk that management does not have a clear view on the amount of work still required. The UK’s negotiations with the EU could result in changes to customs processes in the UK and other EU member states. These negotiations could introduce changes to the new system requirements shortly before the planned implementation date.

There could be positive and negative implications here:

[Negotiations] could also provide a transition phase for leaving the customs union which gives more time to implement CDS. HMRC will use change control procedures to evaluate what any new requirements mean for the programme’s cost, time and delivery schedules. The cost and time needed to make such changes could range signifcantly. For example, they could require CDS to implement an entirely new data model or they may require a relatively simple change to tariffs. More significant changes could mean HMRC has to rely on contingency arrangements for a period of time, or require a negotiated transitional period beyond March 2019 to implement all the necessary changes.

There’s also the prospect, if the UK drops out of the EU customs union and expands its trading relationships globally, that the number of transactions proceessed by CDS would increase by around 200 million and more than double the number of traders having to go through customs processes:

Core parts of the system work in other countries but have not yet been used at the volume and intensity the UK might need. For example, the customs declaration management component has been tested to cope with 180 million declarations a year compared with the 255 million which may be needed. Until it is shown to work at this level and with the UK’s specific systems, there is a risk that this new component may not meet the UK’s requirements.

And all the time the clock is ticking. The NAO warns that there’s no wiggle-room on offer:

HMRC has only two months between January 2019, when it plans to complete the transition to CDS, and March 2019 when the UK plans to leave the EU. This provides little contingency time should the programme overrun or unexpected problems occur. Transition from CHIEF is planned to start in August 2018, with all users expected to make declarations in CDS by January 2019.

Whatever happens, the NAO urges the government as a whole to face up to the difficult questions aired in report, concluding:

While HMRC is working to manage the risks and issues identified in this report, and is developing contingency plans, the whole of government must choose now whether it needs to do more to help HMRC to mitigate the risk of the system being needed, but not ready in time. For example, by prioritising funding and resources to speed up progress with the programme, and by supporting HMRC to develop contingency options. What is not reasonable is leaving HMRC to decide alone what mitigating actions are needed.

Government as a whole must decide what priority it attaches to the CDS programme, and whether any extra costs linked to having a suitable customs system in place by early 2019 are an insurance premium worth paying.

My take

There’s a simple answer to that last question – yes, yes they are. This cannot be allowed to fail. This won’t be the last technology-related problem waiting to be dealt with during Brexit, but it’s certainly one of the most important to be dealt with from an economic well-being point of view.

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