Brexiters' customs model 'could cost £20bn for UK business'

The post-Brexit customs model favoured by Boris Johnson, Liam Fox and Michael Gove could cost business as much as £20bn a year, the head of HMRC has said, a verdict that delivers a huge blow to the Brexiters’ hopes of a complete departure from the customs union. Jon Thompson told the Treasury select committee that their preferred “max-fac” model, which relies on technology and trusted trader schemes to minimise border checks, would be substantially more expensive than the alternative.

Cabinet sources claimed that they had never been briefed by HMRC that the cost could be so high. The huge figure, which represents around double the UK’s annual net contribution to the EU, sent shockwaves around Westminster. Theresa May’s preferred option, the customs partnership model, under which the UK would collect tariffs on behalf of the EU, would be virtually cost-free because businesses could claim back the levies, Thompson said.

The prime minister has faced veiled threats from leading Brexiters including Johnson, Michael Gove and Jacob Rees-Mogg in recent days to drop the partnership model and press ahead with their max-fac option instead.

A customs union is an agreement by a group of countries, such as the EU, to all apply the same tariffs on imported goods from the rest of the world and, typically, eliminate them entirely for trade within the group. By doing this, they can help avoid the need for costly and time-consuming customs checks during trade between members of the union. Asian shipping containers arriving at Felixstowe or Rotterdam, for example, need only pass through customs once before their contents head to markets all over Europe. Lorries passing between Dover and Calais avoid delay entirely.

Customs are not the only checks that count – imports are also scrutinised for conformity with trading standards regulations and security and immigration purposes – but they do play an important role in determining how much friction there is at the border. A strict customs regime at Dover or between Northern Ireland and the Republic of Ireland would lead to delays that will be costly for business and disruptive for travellers. Just-in-time supply chains in industries such as car making could suffer. An Irish peace process built around the principle of entirely unfettered travel between north and south could be jeopardised.

The issue has split both her cabinet and the wider Conservative party, with May forced to divide her cabinet into two groups to fight out their differences over Britain’s post-Brexit customs arrangements. Both options have already been dismissed by Brussels as “fantasy-island, unicorn” models.

Brexiters have warned that a third “backstop” option, agreed by the cabinet last week in case the Irish border issue is not resolved speedily, must remain in place only for a short time, fearing that it could be a back-door means of keeping Britain tied to the EU indefinitely.

Some in Westminster believe if Brussels accepts the UK’s alternative plan, which would keep Britain aligned with elements of the single market and customs union if no other agreement is reached, it could become the post-Brexit norm. However, there have been reports that Brussels might reject it.

Downing Street played down the the HMRC’s £20bn estimate. May’s official spokesman said: “The prime minister has asked for work to be done on both customs models. That work is ongoing and therefore any speculation about implementation is just that.”

However, Thompson told MPs that max fac would force firms to draw up UK customs declarations at £32.50 a time, while there would be similar charges on the EU side of the border. Rule-of-origin protections for particular products, such as Melton Mowbray pork pies, would mean higher charges still.

“So you need to think about the highly streamlined customs arrangement costing businesses somewhere in the late teens of billions of pounds, somewhere between £17bn and £20bn,” he said. “The primary driver here is the fact that there are customs declarations.”

The HMRC chief said there were approximately 200m intra-EU consignments made by firms each year, according to figures checked by the National Audit Office. The customs partnership model, by comparison, would in theory allow goods to cross the border without the need for comprehensive checks, which would be significantly more economical for businesses. They could expect to pay a maximum of £3.4bn a year in total, he told MPs, although in reality it could be “a net cost of zero or less, depending on the tariffs drawn up by the UK and Brussels, because businesses could claim them back”.

The Treasury committee chair, Nicky Morgan, summarising the potential costs of the max-fac arrangements, asked Thompson whether it would be a relief if parliament voted for a customs union. He said it was for MPs to decide.

Tory Brexiter Bim Afolami MP said the figures should give ministers pause for thought. “Leaving the customs union is the right policy, but whatever the solution we come up with must not be hugely costly and burdensome to British business. That would not be a good outcome,” he said.

Thompson also said it would take between three to five years to begin implementing the UK’s new customs arrangements, depending on which of the two options were decided upon by the government.

While they would be unable to begin putting them in place until a decision was made, he insisted that the UK border would still continue to operate from the moment Britain left the EU. However, he admitted that such a border might not be “fully optimal”.

Even so, there could be issues posed by the land border in Northern Ireland with the Irish Republic. “There is a design challenge for us,” he said. “If you look around the world, even the most technologically advanced customs borders generally involve some kind of infrastructure,” he said.

A No 10 spokesman said: “We have been clear on a number of occasions that our intention is to be ready by the end of the implementation period.”