• UNITED KINGDOM

    Indirect Tax News - July 2022

10 common pitfalls with customs declarations

Since Brexit, the UK customs duty legislation and requirements businesses must comply with to move goods between the UK and the EU have changed. Many businesses are failing to address the procedural changes for importing and exporting, which can lead to costly delays, assessments and penalties.  

Failures can emerge in various ways when importing and exporting goods, and may only come to light months or years later, taking into account the three-year historic assessment period for imports and exports. It is therefore vital that businesses ensure that their controls and oversight are robust, especially when using freight forwarders and agents. The following are common risk areas that can lead to compliance breaches:  

  • Missing information on the customs declaration 
  • ​Incorrect information on the customs declaration 
  • Customs classification 
  • Valuations 
  • Misunderstanding the rules of origin
  • Using incorrect Incoterms with a business not understanding its role in import/export compliance 
  • Supply chain changes 
  • Not checking customs declarations submitted by a freight forwarder or customs broker 
  • Lack of documentation to support a technical decision taken, e.g., no valuation policy 
  • Lack of internal controls to ensure compliance

Missing information 

It may seem obvious, but if information is not provided to the UK tax authorities (HMRC) on a customs declaration, the declaration will be rejected and the import or export will be delayed until the correct information is provided and accepted by HMRC. Similarly, customs systems automatically validate data in a range of ways for consistency to identify simple and transposition errors at the earliest stage; for example, missing invoice information on the agreed terms of delivery is one of the most frequent reasons for HMRC to raise questions and delays customs clearance. 

Incorrect information 

Customs declarations with incorrect information are instantly rejected by the authorities. Inaccuracies may be as simple as an incorrect description of the goods or the wrong number of goods in the shipment, either of which could arise where there are multiple or repeated shipments of stock items requiring repeated declarations. Quality checking customs declarations either on a sampling basis or using appropriate software to compare them to the relevant invoice can help to identify discrepancies (e.g., comparing the number of items against the declared weight of the goods). 

Customs classification 

If goods are declared to HMRC under the wrong customs classification (even if this does not affect the duty rate applied), the declaration could be rejected. An incorrect code will often lead to an incorrect payment of duty (the authorities only do a small number of sample checks of goods against declared codes), which can lead to overpayments or, worse still, underpayments that can lead to penalties down the line.   

For businesses new to making customs declarations, getting the classification right can be difficult so it is vital to ensure that the invoice clearly describes all goods covered, including the purpose for use, the materials and the characteristics of all items. Even if a freight forwarder is to complete the customs declarations on behalf of a business, obtaining expert support to help identify the correct classifications of goods that regularly move across borders will enable the business to build up a database of common codes and goods that facilitate quality checking and can be provided in standing clearance instructions to the customs broker.  

Valuations 

The standard method of determining the value of goods for customs duty purposes is most often the transaction value (i.e., the selling price of the goods), but complications can arise when there are multiple sales around the time of import. For example, which sale should be used as the value base for import or what happens if the business is moving its own goods and there is no sale? Getting the customs value correct and having a supportable documented valuation policy is essential to ensuring compliance. 

Since Brexit, complexities around shipping between the EU and the UK have led to rapidly changing sales models, often between related parties, which can lead to additional complexities around the treatment of royalties/license fees and transfer pricing adjustments.  

An incorrect value is one of the most common errors picked up by HMRC. It can often be as simple as not including the insurance and freight payable to the point of importation to the transaction value or adding in inland freight that should not be included in the customs value and paying too much customs duty.  

Misunderstanding the rules of origin 

Both the EU-UK Trade Cooperation Agreement (TCA) and the UK’s other third-country Free Trade Agreements (FTAs) provide an opportunity for duty-free movement of goods between the signatory territories. However, to qualify for duty-free movement, the goods must meet the relevant ‘rules of origin’ set out in the specific FTA between the country of export and import.  

The rules of origin are designed to prove that the goods originate (i.e., they are grown, caught, mined or sufficiently processed in the exporting country) or have preferential origin in the country of export. Origin rules differ by commodity code and type of goods; they are also specific to each FTA so an origin rule from the EU could be very different to the rule for the same goods imported, for example, from Japan.  

HMRC recently removed the transition period concession on holding proof of origin at the point of importation from the EU; it is now a legal obligation that the importer hold an origin certificate, supplier declaration or sufficient evidence to support using importers’ knowledge to claim preferential origin when goods are imported into the UK from the EU. Not holding this information enables HMRC to challenge any claim to preferences, with the potential for assessments and penalties. 

Not understanding how Incoterms affect the supply chain 

Many companies are not fully aware of the specifics of Incoterms (i.e., rules that define the role the buyer and seller fulfil within the supply chain and customs clearance of the goods being shipped). Common risk areas include: 

  • Not clearly understanding the difference between delivery duty paid (DDP) and delivery at place (DAP); under the former, the seller is the importer in the customer’s country and under the latter it is the buyer. 
  • Not realising which Incoterms are actually being used; for example, UK companies thinking they are buying on DDP terms, whereas in reality, to circumvent legal restrictions as to who can be an importer in the UK, DAP terms are applied. This makes the UK buyer the official importer without giving consent or often even realising that different terms are applied and it creates a filing obligation for the customs declaration and payment of import duties. 
  • Entering into sales contracts with EU buyers on DDP terms even though it is difficult for a UK company to act as an importer in the EU if it is not established there, which creates problems from both a customs duty and a VAT perspective. 

Lack of understanding in this area can lead to incorrect declarations causing delays and difficulties that cause poor commercial relations with customers/suppliers. It can also lead to legal disputes in the event of an importation audit from a customs authority as to who is legally responsible to pay any additional import duty or penalties.  

Supply chain changes 

A change in suppliers or shipping route can have a significant impact on customs declarations for what seem to be essentially the same products or components. In reality, the contract terms will likely be different, the rules of origin may be different and even the classification of goods may be different (if different raw materials are involved), all of which could alter the customs declarations that are needed.  

Not checking customs declarations completed by a freight forwarder or customs broker 

Even though a business may have contracted the customs declaration completion and submission process to a third party freight forwarder or customs broker, the importer is still legally responsible for the information submitted and import taxes due upon customs clearance of the goods. In other words, the business is responsible to HMRC for any errors made in its name by the freight forwarder or customs broker. In our experience, many companies either do not receive copies of the customs declarations from their freight forwarders or customs broker or if they do, do not carry out sufficiently detailed and accurate checks on a sufficiently large sample of customs declarations to identify errors and rectify these through post declaration amendments. 

Not only are businesses  storing up incidences of “noncompliance” with UK customs legislation, they often do not realise the growing risk and only become aware when the authorities initiate a customs audit. In addition, if the business is covered under the Senior Accounting Officer (SAO) regime, then having no control and oversight over the submission of their customs declarations means they are not meeting their SAO obligations. 

Lack of technical back-up 

Pressure to fulfil an order and meet delivery schedules often means that companies take a chance and assume that their customs duty declarations and supporting evidence are correct rather than taking the time to obtain expert advice. This often leads to HMRC being less understanding during an audit and the subsequent issuance of assessments or penalties when the business fails to prove it took a due diligence approach to its customs compliance.  

In addition, if customs compliance is complex (e.g., the business does not sell its goods and needs to use an alternative method of valuation or has to document how transfer pricing affects customs value), having business policies that are documented and supported by specialist advice are key to supporting the position take during an audit by HMRC.  

Lack of internal controls  

As with all tax documentation, failure to operate a review and control system for customs declarations may mean that systematic errors could be overlooked, which lead to substantial duty liabilities being built up over time. It can also lead to HMRC taking the decision that any customs and excise approvals should be suspended or revoked until the business can prove due diligence with respect to your customs compliance.  

Hakan Henningsson
[email protected]

Juliet Wallwork
[email protected]

Matthew Clark
[email protected]