Trade remedies regime, powers and impact on business top MP concerns on customs bill

Report on Taxation (Cross-border Trade) Bill second reading debate in the House of Commons on Monday 8 January 2018.

Overall principles

The Financial Secretary to the Treasury, Mel Stride, introduced the Bill on behalf of the Government, reiterating the Government’s view that exiting the EU necessarily means exiting the Customs Union, notwithstanding that the Bill contains provisions (clause 31) enabling the UK to enter into a customs union with the EU or anyone else in future should we choose to do so. He repeated the Government’s commitment to continued UK-EU trade that is ‘as frictionless as possible’, explain that that meant, among other things, avoiding a hard border on the island of Ireland.

The minister took a large number of interventions. From his own side Kenneth Clarke hoped that clause 31 would enable the UK to stay in the Customs Union or make a speedy return to it. The minister said this was not going to happen. Clarke also asked whether it remains the Government’s preference “that things should stay the same if the negotiations are successful?” The minister replied that the Government want a “smooth and frictionless trading situation between ourselves and the European Union once we have left it. Although we will have left the European Union, the Bill will facilitate our ability to have similarities in the way in which we trade. It will then be up to us to decide how we deviate from our starting point.”

The minister reiterated that the Government looked forward to discussing both of the two options sets out in the Customs White Paper with their European partners – that is, “a highly streamlined customs arrangement, which comprises a number of measures to help to minimise barriers to trade, from negotiating the continuation of some existing trade facilitations to the introduction of new, technology-based solutions”; and “a new customs partnership: an unprecedented and innovative approach under which the UK would mirror the EU’s requirements for imports from the rest of the world that are destined for the EU, removing a need for a formal customs border between the UK and the EU.” In response to a question from Vicky Ford (Con), a former chair of the European Parliament’s Committee responsible for the customs union, he confirmed that the Government are still open minded about both options and are “determined to explore both models actively”. He acknowledged that the second, ‘new partnership’, model “would probably happen on a longer timeframe than some of the other approaches”.

John Redwood (Con) was dismissive of concerns about leaving the Customs Union, noting that excise, VAT, general taxation and currency are all different on the other side of the channel or over the Irish border, so why should adding another line to the electronic register because there was a customs charge be a problem? The minister shared this optimistic view, adding that there were many examples around the world of technology in particular facilitating the free flow of goods across international boundaries.

Lib Dem Brexit spokesperson Tom Brake said Ministers were advocating a move “that they know is damaging to the UK’s interests”. “I believe that the Bill is unnecessary and, indeed, highly damaging. It was required only because the Government have set themselves against the solution that is our staying in the customs union.” He also criticised Labour for ‘trying to sit on the fence’ on the customs union and single market.

Vicky Ford (Con) said she believed “staying in the customs union might help to sort out our trade with Europe, but what would it do for our trade with the rest of the world? … [The EU] will be negotiating new trade agreements. Trade negotiations are always controversial and always involve trade-offs. British interests are not always directly aligned with the rest of the EU, and having to accept future trade deals without any say over the terms is not a practicable solution”.

Conservative backbenchers by and large supported the Bill, albeit with a few concerns. Folkestone MP Damian Collins (Con) wanted a commitment to deliver the Operation Stack relief lorry park in Kent.” Anna Soubry (Con) though, argued for remaining in the customs union.

Trade remedies

Trade remedies was a recurring theme.  Shadow Chief Secretary to the Treasury Peter Dowd (Lab) savaged what he called the ‘pitiful’ trade remedies being proposed by the Government. “The Opposition will oppose any attempt by this Government to undermine UK manufacturing and jobs by the weakening of trade remedies, as well as any attempt to unilaterally dismantle the external tariff and open up UK markets to unfairly priced goods. This is a question not of protectionism, but of fairness and the rule of law”. On the specifics Dowd said “Schedule 4, in particular, has little detail on how investigations will be conducted or on how calculations and remedies will be applied. In addition, a mandatory lesser duty rule is completely out of step with the direction the EU is heading in and with the majority of countries in the World Trade Organisation.”

Alex Cunningham (Lab) was concerned that 7,000 manufacturing jobs would be at risk in his constituency if the UK does not establish effective trade remedies. The minister agreed that this was an ‘extremely important matter’ and said that was why this Bill and the Trade Bill made provision for the setting up of trade remedies authority.

Stephen Kinnock (Lab) was concerned about dumping of Chinese steel. “Even though schedules 4 and 5 of the Bill refer to incredibly onerous public interest and economic interest tests, there is absolutely no detail of how so many of the practical aspects will work,” he complained, accusing the Government of “leaving our manufacturing sector completely exposed to the dumping of Chinese steel”. The minister replied that the Bill took a ‘balanced approach’ to the issue of protecting our domestic producers. “By ‘balanced approach’, I mean that we should also take into account the interests of consumers of those imported goods and businesses that use them in their processes,” he explained.

Gareth Snell (Lab/Co-op) focused on arrangements for market trade remedies. The mechanisms in schedule 4 “do not include a system for how we calculate injury from non-market economy countries. They do not point out how we calculate injury. The Bill commits us to the mandatory lesser duty rule, which is something that the EU is moving away from.” However Marcus Fysh (Con) defended the ‘lesser duty’ provisions saying they are there “to try to prevent an arbitrary and egregious application of trade remedies. However, we need to make sure that we use our opportunities arising from coming out of the EU to make these arguments for how the global trade system should work in a non-egregious and non-arbitrary way,”

Tom Brake (Lib Dem) noted that trade remedies are currently implemented by the EU, “which has more than 100 such measures in place against imports from 25 countries. To what extent does the Minister expect those measures to be replicated?”

Simon Clarke (Con) called for improvements to the trade remedies provisions  in three area: “First, there is the broad lack of detail. For example, there is currently very little detail of how investigations by the Trade Remedies Authority will be conducted and remedies applied. There is also uncertainty about how injury to producers will be calculated and quantified.” “Secondly, although it is entirely reasonable that an economic interest test is conducted by the TRA prior to the recommendation of definitive measures, it is not clear why such a test is required before the recommendation of provisional measures.” “Finally, the Bill states that the TRA will be unable to open an investigation if the UK market share of a domestic industry filing a complaint is below a certain threshold, which is as yet unspecified. That provision will leave many producers uncertain whether or not they fall within the scope of the Bill’s protections.”

Responding, Mark Garnier (Con), the then International Trade minister, said the framework “will provide UK industry with a safety net against injury caused by unfair trading practices and by unforeseen surges of imports. It will be a key part of ensuring an effective rules-based system for a fully functioning independent trade policy. It is important that the lesser duty rule provides for proportionate protections which remove injury to UK industry without unnecessary costs, and the economic interest test will provide a sensor check to ensure that measures are not imposed where they might have a disproportionate impact on the wider economy. The UK market is a relatively small but complex market, and the effect on competition and consumers of duties that are too high could be significant. Both the economic interest test and the lesser duty rule have been designed with that in mind.”

HMRC and the new customs system

A number of MPs offered concerns about resourcing of HMRC and the new customs declaration services system. Labour’s Peter Dowd accused the Government of trying to “do Brexit on the cheap with their refusal to fully fund and resource HMRC.” He said Labour would attempt to amend the Bill to require Ministers to report back to Parliament on HMRC staffing levels and on the progress on testing and implementing the new systems. 

Sammy Wilson (DUP) referred to remarks from HMRC’s permanent secretary that HMRC “believes that all of what is required is doable, and indeed that it is confident that we can have the movement of trade without significant disruption”. The minister responded that the customs declaration services system that will need to be in place to handle around 300 million import and export transactions and declarations is well on target. It will start to go into use by this autumn and we firmly believe that it will be up and running by next January - well in time for the 29 March deadline.

Stephen Doughty (Lab/Co-op) asked how many new customs officers were currently in training to prepare for the new customs regime in March 2019. The minister acknowledged that HMRC Chief Executive Jon Thompson had said that between 3,000 and 5,000 staff will be required, but he thought some might be reallocated from other parts of HMRC rather than them all being new recruits.

Kirsty Blackman (SNP) said UK businesses have questions about the capacity of HMRC to deal with the volume of customs declarations, and many businesses will have to make customs declarations for the first time. “Businesses are already concerned about the loss of the HMRC hotline that they could previously access. One business contacted HMRC with a query and received a reply seven months later. Seven months is not an appropriate timescale. If HMRC cannot respond to complaints and questions timeously now, how will it do so in the future after a fivefold increase in the need for customs declarations?”

Phil Wilson (Lab) was alarmed that the new customs declaration system will be available only two months before the Government’s proposed Brexit date of 29 March 2019 if there is no transitional period. “That presents a strong argument for remaining part of the customs union, at least for a transitional period. In my view, we should do so not only for a transitional period, but beyond it.”

Impact on business

A number of MPs wanted more extensive impact assessments or studies than are currently available. Catherine West (Lab) asked the FST to tell the House “the estimated impact on the beef and dairy sectors in Northern Ireland, following today’s article in the Financial Times that flags up the massive cost to the industry that a completely new customs union system would entail”. The minister replied that until we know where any UK-EU deal lands it is not possible to start opining on such impacts.

Tom Brake (Lib Dem) said that, contrary to claims by the leave campaign that leaving the EU would cut red tape, he could not see how businesses would benefit from “a reduction in red tape in any shape or form as a result of this legislation. Instead, businesses that are not subject to red tape at the moment will have to take on red tape that they have never previously had to deal with.”

Nigel Mills (Con) noted that the UK has a far smaller proportion of importers who are authorised economic operators than Germany does. “There needs to be a real impetus during the passage of this Bill and afterwards to ensure that HMRC is doing everything it can to get businesses signed up to that process, so that we have as many of those operators in place as we possibly can when we really need them.”

Catherine McKinnell (Lab) asked what impact assessment the Government have carried out of the proposals for the stand-alone UK customs regime contained in the Bill. “Given that a recent Federation of Small Businesses survey found that small businesses already spend one working week every year complying with their existing VAT obligations, is it not crystal clear that the Bill will have serious implications for UK productivity rates, projections for which have already been seriously downgraded in the autumn Budget?

VAT

Stella Creasy (Lab/Co-op) returned to an issue she has raised before – “the impact of the 13th directive and the ability of other countries, once we are outside the EU, to vary their own VAT requirements. How can he be so confident that by next January he will be able to implement a system that looks at import and export tariffs, given that it will still be dependent on all 27 countries determining their VAT relationship with us?” The minister explained that the 13th directive is “principally used by countries and businesses outside the EU for the purposes of reclaiming VAT within the UK [and] will not necessarily be an issue, depending on where the negotiation between us and the EU lands. It is quite possible—indeed, the Bill facilitates this—that continued engagement with IT platforms will allow an easy and effective method of making the kind of reclaims to which the directive relates. She raises the question of whether we have to be ready by next January. If we have an implementation period, for example, we might have considerably longer to bring the process into effect.”

Chris Leslie (Lab/Co-op) asked the minister to clarify whether it was the Government’s policy to try to remain a member of the EU VAT area. The minister replied that the Bill’s purpose was “to ensure that on day one we are ready for whatever eventuality we are faced with.”

Treasury Committee Chair Nicky Morgan (Con) was among the MPs raising the issue of import VAT, which had been highlighted in the press that day. “He will be aware that many small businesses in this country have not had to deal with import VAT, because they have been dealing with imports from the EU, and that finding upfront cash to pay for that would be a real problem for them. Will he assure the House that he is aware of that issue and the concerns of small businesses about cash flow, and that he hopes to return to this matter?” She said she would write to HMRC “to ensure that we understand its current thinking.” The minister said he had sympathy with Morgan’s point. “We do not want over 100,000 businesses to be disadvantaged in cash terms in the way she describes, so this is certainly something that we will be looking at closely going forward. The Bill itself does not prescribe any particular endpoint in this context. It will be for the Government, after the passage of the Bill, to decide exactly where we wish to end up.”

Nigel Mills (Con) suggested it would be generous to let large businesses off earlier VAT payments if those same businesses are forcing their smaller suppliers to accept 120 day payment terms. The minister indicated that the issue of delayed payment was probably beyond the scope of the Bill.

Minister Mark Garnier (Con) responded to calls for an impact assessment on the effect of the VAT regime: “I make two points on that. First, we cannot do an impact assessment of any meaningful depth until we know exactly what deal has been achieved with the EU. Until we reach that point, any impact assessment will be merely a random guess. Secondly, the Chancellor in his autumn statement made the incredibly important point that he will do everything he can to mitigate the effects of the changes to the VAT regime as we change it under the Bill.”

Scrutiny and powers

A number of MPs were concerned about the scope of the powers under the Bill. From the Labour frontbench Peter Dowd said: “Ministers are being handed powers to set import and export duties, preferential rates and quotas across any good or service sector in our economy. This Bill will give the Government the power fundamentally to reshape the environment in which our economy operates with a few strokes of a pen.”

Chris Leslie (Lab) accused the Government of trying to “twist parliamentary procedure by deeming this measure to be a money Bill.” “They have gutted the Trade Bill and stuck everything they possibly can into what was the customs Bill so that it cannot be amended by the House of Lords... [But] there are whole clauses in the Bill, such as clause 31, that are about the formation of a customs union. How is that a matter purely for a money Bill? It is absolutely an issue of public policy to do with our trading alliances that the other place should have every right to pass comment on. If it has advice and suggestions for this place, it should be allowed to amend the Bill.” Leslie raised a point of order with the Speaker, to which the Speaker confirmed that he had made “no decision at all at present about the certification of a money Bill.” However it is generally expected the Bill will be so certified. 

On scrutiny, Leslie said that he thought that, “at the very least, the Government will be pushed by the other place into a super-affirmative procedure whereby the Commons has a Committee that looks at the details and suggests amendments and changes. Ministers may then plough ahead if they want, but a super-affirmative procedure would mirror more the powers of MEPs in these matters. A simple aye or nay would be a dilution of the scrutiny powers that we currently have democratically via elected Members of the European Parliament.”

Sir William Cash (Con) observed that the Bill “refers to Orders in Council, which the Financial Secretary has mentioned, and also includes the words “despite any enactment”. Could that include the European Union (Withdrawal) Bill, when it has been enacted? Could it also include any other transitional arrangements under a further enactment?” The minister sought to reassure MPs that the Bill “is extremely clear that any treaty between ourselves, as a customs union, and another territory or customs union must be subject to a draft affirmative statutory instrument. Having been laid, such an instrument would not come into effect immediately, but only when Parliament—or, specifically, the House of Commons—had considered and passed it. At that point, and only at that point, would an Order in Council follow, which would effectively bring the will of the House into law.”

For the SNP Kirsty Blackman noted that the Bill “creates so many delegated authorities that the Government have had to produce an 174-page document detailing them”. These include four instances where ‘Henry VIII powers’ —the power to amend or repeal an Act of Parliament through secondary legislation—are being created. which are particularly concerning. She quoted the CIOT’s concern that: “The Bill will, we understand, have the powers to amend primary legislation using secondary legislation; raising similar concerns around delegated powers as with the EU (Withdrawal) Bill.”

Nigel Mills (Con) had some concerns about what the Government are trying to achieve on customs unions. “I am not quite sure why we need such a broad-ranging power in the Bill because, as far as I can tell, there is no time limit or geographic limit on this power. In theory, we could do a customs union with the trans-Pacific trade area in 25 years’ time, and it could go through on the affirmative resolution process. I am not sure that that is what we intend.”

Marcus Fysh (Con) was concerned about clauses 42 and 47 which, he felt, seemed to give the Treasury and Treasury Ministers “the power to alter fundamental concepts of EU law and the application of it in the future.”

Winding up for Labour, Anneliese Dodds said that “there must be much more parliamentary oversight of our future customs and tariff regimes. We will table amendments in Committee to set out workable arrangements to ensure that governmental decisions are subject to appropriate parliamentary scrutiny and, in particular, why the Government should use amendable resolutions, not ministerial fiat, when deciding important issues such as changing customs tariffs, preferential rates for different countries and remedies for different international trade disputes.”

Rules of origin

On the subject of the negotiations that the UK is having with countries with which it currently has free trade arrangements because it is part of the EU, Kirsty Blackman (SNP) wondered what discussions the Minister had had about cumulation (in relation to rules of origin) and about whether the EU will accept UK-EU cumulation, or whether we will be required to have parts made only in the UK? The minister did not answer directly, saying only that these were “matters of ongoing discussion within the Department for International Trade”.

Julia Lopez (Con) said that “Cumulative rules of origin may prove hard to negotiate, requiring trilateral discussion between the UK, the EU and the third country concerned. None the less, the UK’s departure from existing free trade agreements is not challenge-free for the EU either.”

Borders and ports

Nigel Mills (Con), a member of the Select Committee on Northern Ireland Affairs, said the committee had recently visited Switzerland to see how the border with the EU works. “We saw that we can actually minimise the amount of declarations needed if we can make the systems mesh, synchronise and talk to each other. We do not want to see a business making a declaration in the UK for the export of something and then making an equivalent declaration in France when that is imported into the EU system.”

Jonathan Edwards (Plaid Cymru) was worried Welsh ports would lose businesses as traders with Ireland by-passed the UK. made

Anna Turley (Lab/Co-op) and Simon Clarke (Con) made the case for Teesport to become a free port. “Conferring free trade status on a UK port would place it administratively outside of customs territory,” said Turley. “It would mean that goods could be imported, manufactured or re-exported inside the free trade zone without incurring domestic customs duties or taxes, which is paid only on goods entering the domestic UK economy. She said a  free port “could be part of a range of policy solutions to maintain and enhance the attractiveness of investment in this sector in the UK and on Teesside.” Minister Mark Garnier (Con) said Anna Turley “asked a couple of important questions. The first was whether the Government were supportive of free trade zones. The simple answer is yes, but with a caveat that we need to understand them a great deal more. Her second question was whether the Government would advocate Teesport as a free trade port. She made a strong case for that—she speaks very well on behalf of her constituents. The Government will be very happy to engage with her and hear her case for that.”

Conclusion of the debate

MPs voted first on Labour’s ‘reasoned amendment’ asking them to reject the Bill -

“That this House recognises that the UK will need considered and effective arrangements to ensure a customs and tariff regime, including the potential of a customs union with the European Union, is in place before the UK’s exit, in order to guarantee frictionless movement of goods at UK ports and the ability to levy customs duty and VAT and to protect manufacturing and other key industries through the power to enact protective tariffs, but declines to give a Second Reading to the Taxation (Cross-border Trade) Bill because the Government has failed to provide a coherent plan for the operation of the customs and tariff regime after the UK’s exit from the European Union or for the maintenance of frictionless movement of goods at UK ports, because the Bill is not accompanied by proposals to ensure that Her Majesty’s Revenue and Customs are properly resourced and organised to implement a new customs and VAT regime, because the needs of UK manufacturers and producers have not been properly reflected in the design of the proposals and because the Bill proposes to give excessive powers to Ministers without appropriate procedures for parliamentary consultation and scrutiny.”

Labour’s amendment was defeated 309-265.

The Bill was then granted a second reading by 309 votes to 265. A programme motion was passed requiring Public Bill Committee on the Bill (which will commence on Tuesday 23 January) to be brought to a conclusion at the latest on Thursday 1 February.

Updates on committee stage of the Bill will appear on these pages over the next two weeks.

George Crozier
CIOT Head of External Relations, 19/1/18

Posted in: Customs, Indirect Taxes
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