The second reading of the Taxation (Cross-border Trade) Bill 2017-19 – a general debate on all aspects of the Bill - and all remaining stages took place in the House of Lords on 4 September. The Bill is a Supply Bill. The House of Lords cannot amend Supply Bills so committee stage, report stage and third reading are just formalities. As both Houses have agreed on the text of the Bill it now waits for the final stage of Royal Assent. A date for Royal Assent has yet to be set. This is a complex piece of legislation and consists of 58 clauses and nine schedules.
Government opening speech
The Minister of State, Department for International Development, Lord Bates spoke for the Government. He said that since the referendum the Government have met over 300 businesses and other organisations involved in international trade throughout the UK to discuss customs, VAT and excise, and a further 1,700 to discuss wider EU exit issues. The Bill contains a number of provisions that are absolutely essential for any future customs regime to function effectively, regardless of the outcome of the negotiations. These include enabling the UK to charge import duty on goods, including those imported from the EU, enabling HMRC to set out how, and in what form, customs declarations should be made and establishing an independent trade remedies regime.
The Facilitated Customs Arrangement (FCA) clearly would work better if it were reciprocal than if it were just one way, said Viscount Trenchard. He went on to say that if goods from a third country are imported into an EU member state for onward delivery to the UK in a sector where the UK would have applied a lower tariff rate than that applied by the EU, unless the FCA is made reciprocal the EU state initially importing the goods destined for the UK would have to apply the higher EU tariff and the importer would later have to seek a refund from the UK Exchequer, which would seek reimbursement of the difference from the EU. This would be very cumbersome and would have a negative effect on trade between the third country and the UK via the EU. The FCA is cumbersome enough anyway, he complained. “Why do we not hear about the costs in terms of jobs that would have been created here, and tax revenues lost to the nation, as a result of companies establishing businesses outside the EU in order to avoid the EU’s suffocating regulatory tentacles”, he said.
The chief executive of a major Japanese pharmaceutical company told Viscount Trenchard during his visit to Japan in July that it is true that Brexit will increase the cost of its European operations, but it has already invested a considerable sum in adapting its corporate structure to what may be necessary post Brexit. On the other hand, this CEO believes that the UK will remain the best place in the world to conduct research and development and introduce new drugs, and that the regulatory environment in the UK post Brexit should encourage such innovation with a more constructive and less bureaucratic approach.
Baroness Altmann welcomed the Government’s acceptance of the sunset clauses but said the Bill is poorly drafted with some worrying potential flaws. The UK, for example, is now able to enter into a customs union with the EU only if this is passed by a separate Act of Parliament when ‘the scrutiny that comes with joining or establishing a customs union should surely apply equally to all territories’.
The legislation has been rendered incoherent and inconsistent to appease the European Research Group, she said. The Baroness said Clause 54 is not consistent with Section 1.2.1 of the Chequers White Paper that refers to the FCA. It states that, ‘the UK is not proposing that the EU applies the UK’s tariffs and trade policy at its border for goods intended for the UK’. So the Government now find themselves in direct conflict with their own White Paper, she said.
Labour’s Lord Tunnicliffe tabled an amendment to the motion to approve the bill, inserting the words: “but expresses grave concern that the Government agreed to accept, without detailed Parliamentary scrutiny, substantial measures that contradict both the United Kingdom’s stated negotiating position and commitments already entered into with the European Union; and that the bill introduces additional barriers to securing a United Kingdom–European Union customs union.” This was not pushed to a vote.
Labour opposes those clauses that give the Treasury huge amounts of delegated power to set regulations and future customs duty tariff rates ‘through the back door’. Parliament, not the Executive, should have the final say, Lord Tunnicliffe argued. The Lord went on to say the party supports the creation of a truly independent Trade Remedies Authority but the Bill also provides the Secretary of State with a veto to prevent adoption, against the advice of the TRA, if he determines that it is not in either the economic interest or the public interest, both of which remain undefined. “Overall, Labour is concerned about the lack of detail in the Bill to protect UK manufacturing and business”, he said.
Labour welcomes the concessions that strengthen the role of the TRA, introduce sunset clauses for delegated powers and give Parliament a vote on the raising or lowering of import duty and excise duty and on the raising of VAT. But the party urged the Government to resource and staff HMRC to guarantee the successful implementation of the new customs and tariff regime. Its staffing levels have been cut by 17 per cent since 2010 and are set to be cut further this year. Instead of floating a complex and bureaucratic customs fudge, the Government should focus on negotiating a comprehensive customs union for all goods and on securing a proper position for services, said Tunnicliffe.
Lord Hain said those who fantasise that the UK can enjoy frictionless trade under WTO rules need to understand that those rules mean hard borders, including within the island of Ireland. Even under the WTO’s most-favoured-nation rules, if we did not enforce the border in Ireland, we would be in breach of our agreements with other parts of the world, as would be, in parallel, the Republic and the EU. No developed country trades purely on WTO rules, he said. Hain added that the proposed FCA, would appear to breach elements of the General Agreement on Tariffs and Trade—GATT—which is part of the World Trade Organization rules.
The Fairtrade Foundation provided an interesting briefing which covers both the trade and customs Bills, said Lord Browne of Ladyton. It points out that this Bill, as drafted, makes no reference to sustainable development and would allow tariff changes to take place without regard to their impact on developing countries. He referred to a briefing from the Scotch Whisky Association: “Its members tell me that it is now too late for us to get new customs or excise duty arrangements not only for the EU but for their industry in time for any of the expected dates on which we will leave the European Union. It will take years.”
“I cannot find anywhere in the Bill provision for parliamentary scrutiny of future trade negotiations and outcomes—and therefore tariffs and tariff regulation —which is the subject matter of the Bill”, said Lord Whitty.
Lord Adonis said by prohibiting any customs regime for Great Britain which is different from that in Northern Ireland in the Bill we now face a policy which is completely impossible unless Brexit involves no change of any substance in the customs union or the single market in their application to the entire UK.
Lord Stevenson of Balmacara said there needs to be further consideration of how to get away from understanding trade in terms of a physical movement of goods, and that we have to look at trade policy as decisions on it are taken which affect other aspects such as employment, development impacts in third countries, impacts on the environment and human rights
Lord Davies of Oldham said the problem of Northern Ireland will loom large for the Government as trade negotiations take place.
Baroness Kramer said it is a travesty that this Bill comes to the House as a Supply Bill because a proper process through this House would have allowed workable structures to be proposed, debated and offered to the Commons. The FCA is unworkable; it does not provide for a frictionless commercial border between the UK and the 27 for goods, never mind that it utterly neglects services (80 per cent of the UK economy,) she said. “The FCA’s complexity in dealing with imports and tariff differentials is an invitation to fraud on an industrial scale, especially when it comes to parts and bulk imports. There is no hope of policing a system of this extraordinary complexity with so many loopholes and difficulties inherent in it.” The FCA requires us to leave the EU VAT area so that VAT would have to be paid at the time goods cross the border in both directions. The cash-flow hit would wreck many companies, especially small ones, she said. The FCA and its reliance on authorised economic operator status for the big players is costly and cumbersome, she added.
Baroness Kramer moved a Lib Dem amendment that the Lords “expresses profound concern that the proposals in the bill are based on the Government’s flawed commitment to leave the single market and Customs Union, that the Government have failed to produce a comprehensive economic assessment of the consequences for the United Kingdom’s economy of being outside the Customs Union, that they have sought to limit the role of Parliament, and in particular the role of this House, in the revision and scrutinising of the bill, and that they have failed to provide an opportunity for the people of the United Kingdom to have a vote, prior to the United Kingdom’s departure from the European Union, on the terms of the new relationship between the United Kingdom and the European Union”. The amendment failed by 98 votes to 178. This was the only vote of the debate.
Lord Fox said efficient activity such as just-in-time manufacturing will be totally disrupted by the Bill, and the Bill is anathema to the Good Friday agreement: “The Bill establishes a separate customs regime from that of the European 27, so there can never be a friction-free border between the Republic and Northern Ireland.”
Lord Purvis of Tweed said more than 40 per cent of all goods that receive an EU tariff are of an intermediate nature. A good of an intermediate nature by definition must satisfy rules of origin regulations. The Government have given no indication of how such checks will be done or whether our goods or those we import into the UK will be able to comply with rules of origin obligations, he said.
Lord Kerr of Kinlochard complained of a lack of clarity about Trade Remedies Authority such as the authority’s composition and where the power is that establishes it. In mid-August, we were told that Liam Fox’s department has decided to terminate 72 of the 114 EU tariffs currently imposed as anti-dumping measures or because of unfair subsidies. Which 72 will they be? the Lord asked. Business might like to know that because it would helpful for planning. What is missing in this Bill is any provision for the two options spelled out in the White Paper: the highly streamlined customs arrangements or the new customs partnership, he said. Has the new customs partnership been dropped? he asked. He wants the Government to explore the possibility of a customs union between the UK—if it has left the EU—and the EU.
Legislating now for a no-deal outcome sends the worst possible message to our EU partners about whether we really are negotiating in good faith, said Lord Hannay of Chiswick. The Bill forbids the UK remaining in any EU system for charging VAT. “But that will surely inevitably introduce a new element of friction, a new element of bureaucracy, into UK-EU trade. If so, it will cut right across the main objectives of the facilitated customs arrangement.”
Government wind-up speech
Government spokesman Lord Bates disagreed with Baroness Altmann saying the Government have been clear in their White Paper that, under the FCA, the UK would seek to agree a mechanism for the remittance of relevant tariff revenue. The UK has proposed a tariff revenue formula taking account of goods destined for the UK entering via the EU and goods destined for the EU entering via the UK. The Government’s proposal delivers all our commitments to Northern Ireland and Ireland, he said. It means that goods and agri-food would flow freely across the border, with no need for any physical border, infrastructure or related checks or controls, so the backstop would not need to be used. He added that postponed accounting will be welcomed by businesses and it was as a result of listening to business that the Government had brought that proposal forward.
The full debate can be read here