UK Customs crunch warning as new system faces significant Brexit challenges

The UK National Audit Office (NAO) has warned that "significant challenges" remain in the implementation of a new Customs Declaration System (CDS) which is due to go fully live in January 2019.
In a progress update report on the implementation the NAO also acknowledges that HM Revenue & Customs (HMRC) has taken steps to mitigate risks in the final year of its programme to replace its existing customs system, CHIEF (Customs Handling of Import and Export Freight), with the CDS. 
The project began prior to the UK voting to leave the European Union (EU), known as Brexit. However, the UK’s decision to leave the EU and the customs union has important implications for the CDS programme.
The NAO said that, depending on the outcome of Brexit negotiations, at least 145,000 companies who currently trade goods solely within the EU might be required to make customs declarations for the first time from March 2019, and the number of customs declarations could increase from around 55m currently to around 255m each year.
The UK collects around £34bn annually from customs and excise duties and value added tax (VAT) on transactions at the border. In 2017, around £820bn of goods crossed the border.
Said the NAO in its report: “It is vital to the UK’s economy and consumers that trade continues to operate smoothly across the border, for example by maintaining the trade flow of perishables such as food products.”
It added: “We found that HMRC had made progress, but a significant amount of work remained to implement CDS successfully. We concluded that government as a whole had to decide whether it needed to do more to mitigate the risk of CDS being needed but not ready in time.”
NAO also stated: “Since July 2017, HMRC has taken steps to mitigate some of the risks we previously highlighted. However, further technical and business issues have arisen in the CDS programme, and an already tight timeline has become even more demanding.
"Significant challenges remain and there is a risk that CDS will be unable to fully replace CHIEF by January. HMRC has mitigated some of the risk with its plans to operate CHIEF and CDS in parallel over this period."
However, the NAO said that it is also important that HMRC "fully tests and scales-up its contingency option over the summer of 2018," and supports delivery partners such as  software providers to make necessary changes to their own systems. It should also "communicate effectively with traders about new customs processes and migrates them successfully on to CDS".
Brad Ashton, indirect tax partner at RSM, the UK-based audit, tax and consulting firm, commented: “The good news is that HMRC has taken steps to mitigate the risks identified by the NAO’s previous report.  However, significant challenges remain with the risk that CDS will be not able to replace the existing CHIEF system on time. 
“One of the challenges facing HMRC was a lack of funding to fully implement CDS and have a functional contingency plan. The NAO confirms that HMRC has secured some £2.7m, allowing the contingency work to be accelerated. 
“According to the NAO, this should allow HMRC to have the system capacity to handle the additional 200 million customs declarations that it would be required to handle post-Brexit.”
Ashton continued: “HMRC has started to reach out to UK importers and exporters to inform them of the introduction of CDS but rather than the planned implementation of a fully functional system, HMRC plans to go live with CDS in August this year with limited functionality. 
“Further functionality is planned to be rolled out in November and December this year. HMRC believes this approach will mitigate the risks of releasing a complex system from the outset.”
He continued: “The problem with this approach is that HMRC will not know whether CDS actually works in the way intended until full functionality is released. This, in itself, presents serious risks of not allowing HMRC sufficient time to resolve any operational or system issues that may occur prior to the final roll out. 
“Making the contingency of maintaining CHIEF to run in parallel with CDS is a critical factor. With the migration of users to CDS planned for January 2019, exporters will have a potentially fraught time as the export functionality of CDS is not planned to be rolled out until December 2018, giving them only a month to complete the migration process.”
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