Updated HMRC Customs Declarations System unlikely to be ready for Brexit

Plans to implement a new customs system ahead of Brexit - just 9 months away – remain fraught with risk according to a report published by the National Audit Office last week (29 June 2018).  HMRC has yet to fully engage with users and traders according to the spending watchdog.

Brexit Partners believe that these findings are so significant, we have posted more detail than our usual 'summary' insights.  Every business that trades with the EU needs to understand and assess the risks and impact to their operation.  

The number of traders and suppliers declaring customs to HMRC at the border is expected to almost double, from 150,000 to 295,000, while the number of declarations could rise from 55 million to 255 million after Brexit - although this will depend on the outcome of negotiations and, in particular, whether the UK remains within the customs union.

A crucial part of dealing with the extra demand is replacing the outdated CHIEF (Customs Handling of Import and Export Freight) system with a new Customs Declaration Service (CDS) – but HMRC's timeline has slipped, with delays causing it to implement functionality in a phased approach that is putting pressure on the department to get it ready by March 2019.

This report provides an update on HMRC’s progress since July 2017.   It considers:

  • the deliverability of the CDS programme and highlights the risks and issues that HMRC needs to manage to fully implement CDS by January 2019;
  • HMRC’s progress with CDS and its contingency option means for the risks associated with being unable to process customs declarations at the volume required in the event of ‘no-deal’ with the EU;
  • how HMRC is managing the CDS programme - the previous report did not evaluate the overall value for money of the programme;
  • HMRC’s progress in meeting the technical challenges of implementing CDS and creating a working contingency option; and
  • HMRC’s actions to ensure that traders and others involved in customs administration are ready to use CDS by January 2019.

A Parliamentary Select Committee had previously warned of a "catastrophic" impact should HMRC fail to have an operational backup system in the event that CDS wasn't ready on time.

The NAO reports some progress - including establishing some contingency plans.  HMRC had secured the £270m needed for the project, concludes that there are still "significant challenges" to overcome.

"Developing the CDS system to a tight timetable remains a major challenge," said NAO boss Amyas Morse. "Inevitably risks remain, and the next few months are crucial if HMRC is to make this a success."

Among the challenges is achieving the target date of completing migration of all traders from CHIEF to CDS in January 2019 – which the NAO said is "unlikely" due to the fact full functionality is only due to be released a month earlier.

The contingency plan is to scale up CHIEF so it can handle the 255 million declarations, and is expected to cost some £8.7m. The department told the NAO that it would finish testing the system by July, but the watchdog observed that it was still not fully proven.

Beyond this, the NAO report focused on HMRC's plans to get CDS up and running in time for Brexit, noting that the timelines for delivery have been pushed back.

The department has decided to take a phased approach to implementing functionality but – despite this not being declared last year – HMRC told the NAO it had always planned to do it this way.

This means that, rather than CDS being fully functional in August 2018, when HMRC plans to start migrating traders from CHIEF, it will only be offering about 44 per cent of functionality for some import declarations.

This is put down to gaps in the export functionality that require additional work, along with delays accessing CDS production environment and integrating CDS with HMRC's finance system.

Full import functionality is now due in November and export in December, with migration of traders expected to be complete in January.

Not only will this require traders who are migrated over in the first batch to support two more releases and the associated changes with their own systems within just six months – it also means HMRC won't be able to test whether CDS works in live service until it has implemented all the functionality in December.

"The late release of functionality and migration of users increases the risk that HMRC will not have sufficient time to resolve any issues that it might identify with the last release," the NAO said.

Being no stranger to government IT projects, the watchdog added: "As is common with IT systems, even after testing issues may also emerge in the live environment."

There is also the challenge of whether users will be able to complete the process in the month around Christmas, and the NAO noted that HMRC's plans to bring forward release dates would depend not only on CDS development but also on whether users can respond quickly enough.

This problem risks being exacerbated by an apparent lack of readiness among users; trade tests HMRC has run with stakeholders have seen just 15 of 57 software suppliers successfully test all scenarios.

Meanwhile, the NAO said that a survey it carried out in March this year found that four out of five community system providers and 14 of 19 customs software suppliers were "uncertain about exactly what changes they needed to make to their software and therefore when their systems would be ready for users to submit customs declarations".

HMRC needs to improve its communications with existing traders and other users, the NAO said, but added that the department hasn't even started doing so with EU-only suppliers that might need to make customs declarations after Brexit.

Moreover, the NAO noted that success depends on much more than the core IT systems, as HMRC has many more processes that will need updating and testing.

The watchdog said it would review the separate Border Systems Programme at a later stage.

Background to the report

HM Revenue & Customs (HMRC) is now in the final year of its programme to replace its existing customs system, CHIEF (Customs Handling of Import and Export Freight), with a new Customs Declaration Service (CDS). HMRC is changing its customs system to comply with legislative requirements that were established before the UK voted to leave the European Union (EU). The new system will be an integral part of the UK’s overall customs regime. The UK collects around £34 billion annually from customs and excise duties and value added tax (VAT) on transactions at the border. In 2017, around £820 billion of goods crossed the border. 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.

The UK’s decision to leave the EU and the customs union has important implications for the CDS programme. Depending on the outcome of EU exit negotiations, from March 2019 at least 145,000 traders who currently import or export goods solely within the EU might be required to make customs declarations for the first time; and the number of customs declarations could increase from around 55 million to around 255 million each year.

Report concluding comments

The UK and EU have made progress towards an agreement that will leave customs arrangements unchanged until December 2020.  However, until this agreement is confirmed, the government has directed HMRC to continue planning for a ‘no deal’ scenario with the expectation that a fully scaled and operational customs system will be in place in March 2019.

In response to the concerns we highlighted in July 2017, HMRC has accelerated its plans to develop the existing CHIEF system as a contingency option.  This has reduced the risk that it will not be able to handle the potential increased volume of customs declarations at the end of March 2019, in the event of ‘no deal’.

The contingency option is still to be fully tested, and the success of customs preparations will involve many other dependent systems and processes at the border. However, if HMRC completes this work successfully, it will be in a better position in the event that CDS is not ready or does not perform as planned.

Whilst HMRC has taken steps to “mitigate” some of the risks previously highlighted by NAO, 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 2019.

HMRC has mitigated some of the risk with its plans to operate CHIEF and CDS in parallel over this period.  However, it is also critical that HMRC fully tests and scales-up its contingency option over the summer of 2018, supports delivery partners such as CSPs and software providers to make necessary changes to their own systems, communicates effectively with traders about new customs processes and migrates them successfully on to CDS.