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7 Customs Duty Mistakes
Sponsored by International Trade Solutions
The customs regulations are complex and little understood by even the biggest companies in international trade. However, the courts have placed a significant burden on you to get to grips with these regulations. What are the potential implications?
Most freight forwarders act as direct agents, with responsibility for accuracy of the customs declarations and customs debts resting solely with you, the importer. In the UK any mistake you make can result in HM Revenue & Customs taking the following action against you:
- Financial penalties of up to £2,500 per innocent mistake;
- The removal of any customs duty relief schemes you use;
- Lengthy and time consuming investigations;
- Seizure of your goods and any vehicles you use to carry them.
1 January 2008 saw the introduction of Authorised Economic Operator (AEO) status. This badge is likely to become a practical necessity for companies engaged in international trade over the next 10 years and those without it will have real difficulties dealing with suppliers in the US or Far East. Your customs compliance record is a key factor in being able to gain this status. There is more information on AEO on our website.
The sheer volume of imports coming in to the EU in any one day means the customs authorities exercise minimal control on your imports at time of arrival. Instead, they look to audit your compliance through visits to your business. They can look back over the last three years of imports, which often means your small errors can snowball in to a significant exposure.
Businesses are increasingly seeing good customs compliance as more important than planning to cut customs costs.
Set out below seven common mistakes we come across when reviewing importers customs operations:
Incorrect Classification
The customs classification of import is often difficult, especially with mixed or new products because the customs tariff struggles to keep abreast of technological developments. Average duty rate on import to the EU is 4% of the landed costs of the imports, but rates vary from 0 - 217%. Therefore any error can have significant implications to a company's margins with adjustments upwards and downwards.
Failing to make all the necessary adjustments to the purchase invoice price
The customs regulations provide for a number of items that must be added, or may be deducted to the invoice price for customs duty purposes. Each adjustment is subject to various conditions. Typical additions you may need to make to your customs value include royalties, selling commissions, insurance and freight costs to the EU, tooling and materials supplied to the seller by the buyer free of charge or at a reduced cost.
Typical deductions include buying commissions, finance charges, post import support, certain warranty costs. Importers often fail to make the necessary adjustments and your agents may be unaware of their existence.
A clear understanding of your contract and the Incoterms agreed is needed to meet your valuation obligations. Unfortunately, any agents used to submit customs declarations are unlikely to know these key details.
Using an inappropriate method of valuing the goods
The customs regulations set out various methods for determining an acceptable customs value, which must be applied in a prescribed order. However, most of your imports are likely to be valued under method one, using the export sale price. There are a number of instances where it is not possible to use this method, including transfers to branch companies or agents, sub-contract work where the materials are provided free of charge etc. In these circumstances you will need to determine an alternative method of valuation in accordance with the methods set out in the customs regulations.
Incorrect origin on imports
The EU has entered into various trade agreements with overseas countries which allow your qualifying goods can be imported at a reduced or nil rate of duty. Unfortunately, the system is prone to incorrect application by overseas suppliers authorities. Where errors come to light, the customs authorities in the EU will always look to recover the full rate of duty from you. You may be protected from additional duty demands by taking certain steps, known as the Good Faith Provisions.
Incorrect origin on exports
You may be asked to complete origin certificates by your customers in non-EU countries to enable them to import your goods free from duty. This helps make your goods more competitive or improve your margins.
You may be providing these documents without a clear understanding of the appropriate conditions or the evidence needed to support the legal declaration been made. If your goods are found not to qualify you may be subject to penalties. Furthermore, your customer will also be subject to penalties and additional duty demands, which they will seek to recover from you.
Incorrect application of a duty relief scheme
There are a number of customs duty relief schemes available to you to reduce or even remove the customs duty costs. However, all of these schemes require you to take on additional responsibilities. If you fail to comply with all of these obligations, forgetting to submit returns or gather appropriate evidence then any benefits you enjoy can be removed with retrospective effect.
For example, HM Revenue & Customs are currently seeking to recover duties saved by people using Inward Processing Relief (IPR) where their freight agents have not entered the correct information in one of the 54 boxes of the customs export declaration. This error usually results from your failure to instruct the agents properly.
Inconsistent treatment
The customs authorities will have a schedule of all the information you submitted at import and export when they come to carry out an audit. This schedule will often highlight different classifications applied to the same goods imported across various consignments, the entry of your goods in to duty relief procedures but no matching discharges etc. These errors are usually the result of poor communication between you and your agent or through lack of co-ordination between various different business functions within your business or group. These errors are easily identified by HM Customs and indicate a poor level of control of your customs function, making the you more susceptible to lengthy and time consuming investigations. If you are not comfortable with you control of the customs function you should consider carrying out a review to highlight any potential errors, which can then be addressed going forward.
What Can You Do to Reduce These Risks?
We recommend you review your customs procedures including:
- Ensuring that the elements which go to make up your customs duty debts are correct;
- Communicating these elements to any agents you use to submit declarations on your behalf;
- Obtaining and keeping all the information to meet your obligations under Customs Traders (Records & Accounts) Regulations;
- Ensuring adequate controls and checks of declarations made on your behalf; and
- Ensuring you keep abreast of developments which could impact on your customs obligations.
