Fundamentals of customs compliance
The importance of INCOTERMS
Customs audits
and disputes
Customs valuations
Origin and
preferences
Classification
Classification
The Harmonised System (HS) provides a logical basis for the classification of traded goods for customs purposes, common to member countries of the World Trade Organisation. The HS is a key resource for importers and exporters to determine the commodity codes of their products. The commodity code determines the rate of customs duty applicable at import, so any errors can have significant financial implications and also result in penalties.
As well as informing the duty rate, the commodity code is also used to manage customs controls, trade measures and licensing requirements, and for statistical purposes.
Finding the correct commodity code for a given product from approximately 20,000 available codes is therefore essential to get right, but can be very easy to get wrong, often with costly consequences.
The 2022 version of the HS came into effect on 1 January and comprised of 351 sets of amendments, bringing significant changes to the classification of products across many sectors, including agriculture, chemicals, textiles, metals and machinery.
Crowe’s Customs team can review the accuracy of your commodity codes and also provide suitable training where required.
Origin and preferences
Taking advantage of the preferential duty savings available through using the UK-EU Trade and Cooperation Agreement is a key tool in mitigating added costs as a result of Brexit, removing the new duty cost for UK importers of goods from the EU, and helping UK exporters to the EU remain competitive.
But utilising the agreement in this way comes with strict evidence requirements, and businesses should be sure they are acting in a compliant manner to avoid unexpected issues down the line. If claiming preferential tariff treatment upon import on the basis of “importer’s knowledge”, do you know the specifics of the production process? Or of the non-originating materials? This information (and more) must be held by the importer.
If you are a UK exporter being asked by EU customers to include a Statement on Origin on your invoice, are you sure that your products meet the requirements to be deemed of “UK origin”?
Rules of Origin and how preferential origin must be evidenced can be complex and care should always be taken in this area. This of course applies to all trade agreements, as well as when taking advantage of duty savings when importing from developing countries using the Generalised Scheme of Preferences (GSP).
Valuation
Customs valuation is one of the most complex areas of cross-border trade and is an increasingly common focus of customs audits.
The declared customs value is the basis on which customs duty is charged, so errors can have significant financial implications. Over 95% of imported goods are declared on the basis of their transaction value, when sold for export, but not all imported goods are subject to a transaction, or may be subject to additional considerations. Arriving at the correct customs valuation requires consideration of complexities including royalties, assists, transfer pricing, Incoterms® and more, which can all contribute to difficulties in determining the correct customs value.
It is in this context that the EU is planning to soon introduce Binding Value Information (BVI) decisions to be issued at EU-level, with the intention to create a harmonised approach where currently scope for inconsistency exists within the approach between EU member states. Whether the UK will look to employ a similar system is not currently known.
Crowe’s Customs team can review the customs valuation methods used and advise on compliant best practice.
The importance of INCOTERMS®
The Incoterms® (‘International Commercial Terms’) rules are the universally recognised rules for clarifying the responsibilities of the buyer and seller in international sale transactions, defining the allocation of obligations, costs and risk between the parties.
This will include, for example, which party is responsible for arranging the export and import customs clearance. The Incoterms® 2020 iteration is comprised of eleven three-character acronyms which govern the responsibilities of the parties in the end-to-end shipment process, ranging from EXW (ex-works), to DDP (delivered duty paid).
The Incoterms® used should be agreed and fully understood by the seller, the buyer and any intermediaries used for each shipment, as any failure to apply the Incoterms® correctly can result in customs compliance issues and confusion over liability.
As Incoterms® are usually agreed by sales and purchasing teams, it is important that they also understand the obligations attached and that the Incoterms® used are consistent with commercial contracts.
Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterms® Rules may be obtained from the ICC website iccwbo.org.
Customs audits and disputes
For regular importers, UK Customs audits are often an unwelcome intrusion into their business records, taking up valuable time and frequently resulting in demands for underpaid duty.
HMRC use Management Support Systems (MSS) data to select their audit target companies. MSS reports contain all the data declared by or on behalf of an importer, giving HMRC a complete picture of every declaration made.
A Customs audit is the starting point of what could become a very intrusive investigation, based on initial assumptions gained from a spreadsheet report. These assumptions are often not fully investigated but followed through with a demand for underpaid duty, with little or no legal basis.
Around 30% of duty demands which are challenged are either overturned or reduced. However, only 3% of demands are actually challenged.
It is recommended that businesses who have received a duty demand (C18) from HMRC seek specialist advice. There is a well-established process for challenging demands and decisions, but strict time restrictions apply; it is important to appraise the demand quickly and implement the next steps needed to launch a successful challenge.
We can help to manage the audit process if you are contacted by HMRC. Our customs data analytics tool can also scrutinise your MSS data to detect errors and allow for corrective action to be taken before any audit takes place.
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