HMRC under pressure over Brexit customs system – failure would be “catastrophic”

SUMMARY:

MPs on the influential Public Accounts Committee have warned HMRC that the new customs system lacks funding and adequate preparation.

Her Majesty’s Revenue and Customs (HMRC) is being put under significant pressure to assure traders that its new customs system, the Customs Declaration Service (CDS), will be ready come March 2019 – the current planned date for the UK to exit the European Union.

MPs on the influential Public Accounts Committee have issued a stern warning that they are extremely concerned about the lack of funding, progress and contingency plans in place over CDS, which is set to replace the ageing Customs Handling of Import and Export Freight (CHIEF) system.

Timelines are tight as it is, but with Brexit looming, traders could be left with a “catastrophic” situation if HMRC doesn’t manage to get the system up and running.

In 2015, around 55 million customs declarations were made by 141,000 traders. The UK’s exit from the European Union (EU) could see the number of customs declarations which HMRC must process each year increase fivefold to 255 million. The Committee has said that a failed customs system could therefore lead to huge disruption for businesses, with delays potentially causing massive queues at Dover and resulting in food being left to rot in trucks at the border.

The pressure is on, and resources are tight, as HMRC is currently in the midst of a broader, extensive transformation programme, which includes over 250 projects. This includes the already ambitious Making Tax Digital programme.

MPs were surprised to learn that HMRC does not yet have the funding from the Treasury to increase the capacity of CDS – for which development began prior to the outcome of the European referendum last summer – nor does it have final agreement on funding to upgrade CHIEF as a contingency plan, o deal with the potential 255 million customs declarations.

Public Accounts Chair, Meg Hillier MP, said:

Failure to have a viable customs system in place before the UK’s planned exit from the EU would wreak havoc for UK business, trade and our international reputation. Confidence would collapse amid the potentially catastrophic effects.

HMRC is under considerable pressure to deliver the new Customs Declaration Service in time, but it does not yet have funding to increase the capacity of CDS to deal with the consequences of Brexit—nor to develop contingency options.

This is deeply worrying. HMRC requires a relatively small sum to upgrade the current CHIEF system—a move which would provide some peace of mind to traders, many of whom are still operating with limited information and in great uncertainty.

HMRC tells us it is merely ‘in conversation’ over CHIEF upgrade costs when, on behalf of business and the British public, it should be banging on the doors of the Treasury.

HMRC must press the case to secure this funding now and ensure that, if other plans fail, customs will be fit for purpose.

The Committee’s conclusions

Recognising the urgency of the matter, the Committee has compiled a list of conclusions and recommendations for HMRC to act on in order to assure traders that business will not be affected come departure day from the European Union.

Firstly, the Committee is less than convinced that HMRC has done enough to manage the huge uncertainty faced by a large number of traders. For example, HMRC has engaged with some larger traders and groups, but only plans to start wider engagement with all traders after March 2018.

MPs on the Committee don’t understand why HMRC cannot lay the foundations now for this engagement to give them as much time as possible to prepare. The report notes that HMRC hasn’t updated its website significantly since 2014. It also only has 604 ‘trusted traders’, out of the current 141,000 traders currently using CHIEF, which benefit from simplified custom arrangements. This compares to over 6,000 trusted traders in Germany.

The Committee would like HMRC to ensure traders are informed of the new CDS service timeline and progress by January next year, and has said that it should promote the benefits of obtaining trusted trader status.

Worryingly, HMRC has also not taken action to upgrade CHIEF to support additional traders in the case of CDS not being ready in time – in other words, it doesn’t have an effective contingency plan. HMRC puts this down to CHIEF not being very flexible and unable to adapt to changes in wider customs and trade requirements.

The Committee has urged HMRC to ensure that both the CDS and the CHIEF systems can handle 255 million customs declarations, following Brexit, to ensure that in the worst case scenario that there is one system in place that is working.

However, perhaps most importantly, it is the scale and the pace of change that HMRC is undergoing that is particularly worrying to the Committee. Government departments have a checkered past when it comes to wide scale transformation programmes and/or huge IT projects – managing one at a time is difficult enough, let alone several, all running to very strict deadlines.

The report notes:

HMRC told us that CDS is one of its 7 most important programmes but we are concerned about the Department’s ability to balance its overall risks and ensure it puts emphasis on the right areas. HMRC itself recognises that the scale of its operations, its organisational transformation programme, ongoing policy changes, and preparing for the UK exiting the EU, is an unsustainable amount of change to be dealing with at one time.

It intends to undertake a full prioritisation exercise early next year. We agree that HMRC needs to urgently prioritise and make difficult decisions, with the support of HM Treasury. HMRC and wider government need to make CDS one of their top priorities to ensure successful delivery. The UK cannot afford for this to go wrong.

My take

Whilst the Prime Minister’s office may be engrossed in getting a trade deal in place with the EU come March 2019, perhaps equal attention should be being paid to the operational implications of exiting the trading bloc. The Chancellor’s upcoming budget needs to have a strong focus on Brexit contingency plans – this isn’t going to be easy to get right.

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