Jon Thompson, head of HMRC stated in evidence to the House of Commons Treasury Select Committee on May 23 that the additional cost to UK companies of customs administration outside the UK Customs Union could amount to a sum in “the high teens of billions”. These costs would be additional to any tariffs payable to the EU, although the latter may be zero if a free trade agreement is negotiated.

His calculations which, as far as we know not been set out in a published paper, are based on four elements.

– An estimate that leaving the customs union will involve 200 million new customs declarations to the UK authorities.

– Each UK declaration will cost £32.50 giving an aggregate cost of £6.5 billion.

– Assuming a similar cost for declarations to the EU add a further £6.5 billion.

– Additional costs of declaring rules of origin content of imposts of £7billion.

This total cost at up to £20 billion is huge, amounting to over 1% of GDP or 6% of corporate post-tax profits. It is also equivalent to 5.6% of the value of UK trade with the EU (imports plus exports). How is such a large figure generated?

The figure for 200 million additional customs declarations is odd. The figure comes from a National Audit Office report on the Customs Declaration Service (July 13 2017) although the NAO sources the key numbers back to HMRC.

The NAO report shows that there are currently 55 million customs declarations for the £339 billion of trade (imports and exports) with the non-EU world. This amounts to one declaration for each £6,200 of trade. For some reason HMRC then calculates that there will be 200 million new post-Brexit declarations for the £357 billion trade with the EU, i.e. one declaration for each £1800 of trade.  The assumption seems to be that there will be a much larger number of very small declarations in the case of trade with the EU.

The great majority of current declarations for non-EU trade are for imports (47 out of the 55 million declarations). For exports the average size of consignment is £19,000 compared with only £4000 for imports. However, HMRC judge that most declarations for trade with the EU will be for exports (109 out of 200 million).  In this case the average size of export consignments is only £1200. For imports from the EU it is £2400. Hence, HMRC’s expectation is that exports to the EU will consist of a very large number of relatively tiny consignments, unlike exports to non-EU destinations where the average consignment size will be 16 times larger.

The FT report (26 May, p3) that “the HMRC estimate was based on 1 billion parcels per annum, mostly from the EU”. Some of these will go to companies but many may go directly to consumers (and hence should not be included in estimates of potential costs for companies). HMRC currently charge a handling fee of £8 for goods over £15, but this threshold could be raised or abolished for companies if charges were judged to be onerous.

HMRC also appear to have double-counted the number of necessary declarations. There figures include both imports and exports, so there should not be a need to assume that the declarations to UK customs authorities are duplicated in second declarations to EU authorities.

HMRC state that there are currently 68,000 traders trading solely with non-EU countries and 73,000 with both EU and non-EU countries. They also estimate that 181,000 traders trade solely with the EU, and currently need no declarations, although firm figures are not available. That gives 141,000 trading with non-EU countries and a partially overlapping 254,000 with the EU. Since the value of goods trade with non-EU countries is greater than for EU countries, this again implies a large volume of small-scale trade with the EU.

The average cost customs declaration was given by Jon Thompson as £32.50. This appears to have been derived from a KPMG study for HMRC.

The total cost of customs administration (presumably only for non-EU trade) is given as £794 million. Many of these costs were for postal transactions and applied to small and micro businesses and could potentially be mitigated under a max-fac option especially within a free-trade framework.

The HMRC’s overall cost estimate of around £20 billion seems hugely inflated. Other studies would support this conclusion:

– Swiss customs have estimated the costs of running their customs systems at 0.1% of GDP. That’s a tenth of the HMRC figure.

– A World Bank study has customs clearance costs per container of $138-$212, equivalent to 1% of a container with contents valued at £15,000.

HMRC’s estimate for rules of origin represents about 4% of EU export value in 2017 which is towards the top end of academic estimates. It is unclear whether it also includes EU exporters’ costs. A paper from the WTO suggests many published estimates of these costs are much too high.

– A KPMG study for Dutch customs estimates admin costs at around 1% of the value of consignments.

– Tate and Lyle manage annual imports of bulk raw cane sugar themselves with a team of two people. Annual costs for the team are £110000 all in, against a value of imports at £270 million ‘Attributing the whole cost of this team to customs processes would make the customs procedures cost the equivalent of 0.041% of the value of the product. Given the other roles of this team, the true cost is more likely 0.01% to 0.02% of the value of the product.’

– A specific example from Tate and Lyle was the importing of 11 containers of cane sugar from Mauritius administered through a third party customs specialist. Total customs costs were £76.13 for eleven containers, 0.05% of the value of the product imported, which Tate and Lyle  say was £140,000. Additional inspection costs could be £50-100 per container – but are ‘irregular’.

– Even the costs associated with meat imports, which are high due to inspection costs, are estimated by the University of Nottingham to be around 1% of the value of consignments.

– The economist Douglas McWilliams has said that he thinks HMRC have confused container-level costs with consignments and so exaggerated the real total costs by a factor of 20.

The HMRC figure also does not seem to accord with practical experience. The retail company JML judges that customs administration costs amount to around 1% of the value of consignments. JML does close to £100 million of trade per annum with 85 countries and ships roughly 2,000 containers a year from one place to another in the world.  About 80% of these movements are on WTO terms outside customs unions or free trade areas. The average contents value per JML container is around £15k.

The only additional paperwork requirements for business from being outside rather than inside the Customs Union are the production of Certificates of Origin and any necessary compliance certification. This can’t possibly cost £7bn a year or anything like it for firms trading with the EU after Brexit. As things stand at the moment, inside the Customs Union, all shipments from the UK to the EU27 involve invoices and dealing with VAT. If this sort of paperwork is a manageable burden, why should the addition of Certificates of Origin and compliance documentation be such a huge additional cost?

Applying the same 1% to the total value of UK goods trade with the EU (imports plus exports) would give a total cost of £3.6 billion. However, if firms are already submitting invoices and VAT returns for trade with the EU, then the additional burden may in practice be only a proportion of this. A reasonable estimate might be total costs around £2 billion, which is one tenth of the HMRC estimate. What is certain is that no government policy decisions should be made on the basis of shoddy calculations without formal papers which are open to scrutiny from trade experts and businesses with practical experience of trading across borders.

Dr Graham Gudgin is Honorary Research Associate at the Centre for Business Studies, University of Cambridge, and Chief Economic Advisor at the Policy Exchange think-tank in London.

John Mills is chairman of JML and Chair of Labour Leave. He is the author of several books on economic policy.

To see sources read at Briefings for Brexit.