Plans to implement a new customs system for Brexit are still fraught with risk and the taxman has yet to fully engage with users and traders who rely on them, the UK's spending watchdog has said.

Amid growing concerns that the government's systems are not ready to cope with the extra pressures Brexit will bring, the National Audit Office today issued a report on HMRC's efforts to establish new IT systems that will manage the expected increase in traders moving goods across the UK's borders.

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, though this will depend on the outcome of negotiations, such as whether the UK stays in 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A crucial part of dealing with the extra demand is replacing the outdated CHIEF (Customs Handling of Import and Export Freight) system with a new Customs Declaration Service (CDS) – but HMRC's timeline has slipped, with delays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.

In November last year, the Public Accounts Committee warned that HMRC's failure to sort out a backup system if the CDS wasn't ready could have a "catastrophic" impact.

The NAO's report welcomed the fact the department has made some progress, including establishing some contingency plans and that it had secured the £270m needed for the project – but warned there are still "significant challenges" to overcome.

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"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.

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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. ®