10 common pitfalls with customs declarations
10 common pitfalls with customs declarations
The international trade environment has been in a constant state of upheaval in recent years, following disruption events starting with Brexit, Covid, trade wars between China and the US, the war in Ukraine and the Suez Canal event.
In the UK, we are still experiencing some border formality changes this year with respect to animal, plant and food products and all UK exporters now having to move to the newer Customs Declaration Service (CDS) now that CHIEF is finally being mothballed.
Failure to keep up to date with changes in international trade can lead to assessments, costly delays to your supply chain and penalties for your business.
When importing and exporting, errors can appear in various ways, and can only become apparent after months or years. HMRC have a 3-year historic window to raise a customs duty and import VAT assessment, so you must ensure that your processes and controls are robust, especially when using 3rd party customs brokers to submit your declarations to HMRC. Even if you outsource the process of submitting your customs declarations to HMRC or brokers, the risk remains with you as the importer.
So, what potential risks should you be looking out for?
Missing information on your Customs Declaration Form
It may seem obvious, but if information is missing from your Customs Declarations, they will be at least delayed or at worst rejected, and movement of the goods slowed down.
Customs systems automatically validate data in a range of ways for consistency to identify simple errors at the earliest stage. One of the most frequent reasons for questions and delays is missing information such as invoice information, incoterms on the agreed terms of delivery, or, more recently, additional import licence information now that the 999L override code is no longer accepted in CDS.
Incorrect goods descriptions and quantities
Customs declaration forms showing incorrect information in respect of the imported goods can result in delays or potentially a rejected declaration. This could be as simple as an incorrect description of the goods, or the wrong number of goods in the shipment – which can happen where there are multiple or repeated shipments of stock items, which require repeated declarations.
Quality checking declarations either on a sampling basis or using appropriate software such as the BDO Customs Data Analytics Tool to compare them to the relevant invoice can help to identify these errors.
Errors in customs classification
If your goods are declared under the wrong Customs Classification (even if it makes no difference to the duty rate applied), the declaration can be queried and ultimately rejected causing delays to clearance.
If you use an incorrect tariff code it will often lead to an incorrect payment of duty (Customs only do a very small number sample checks of goods against declared codes). This can lead to large overpayments or even underpayments over a historic 3-year period and can also lead to penalties down the line.
For businesses new to making customs declarations, getting the classification right can be very difficult. Even if you use a 3rd party customs broker to submit your declarations, getting expert support to identify the right classifications of the goods you regularly move across borders will help to build up a database of your commonly used tariff codes which will help you identify when incorrect classification codes are used in error.
Our Customs Data Analytics Tool builds a profile for your normal customs declaration data sets and will automatically highlight any commodity codes not used previously for you to investigate.
Using the wrong customs valuation method
Getting your customs value wrong means the figure upon which your customs duty and import VAT calculated is incorrect which can lead to substantial under and over payments plus penalties over a historic period.
The most commonly used method of customs valuation is the invoice price of the goods – the price paid or payable. However, there can be lots of adjustment required to find a customs value.
For example, you may need to adjust for buying or selling commissions, distribution fees and licence rights, royalties and transfer pricing adjustments. All must be carefully considered, and a written customs valuation policy drafted and put in place.
If you don’t have an invoice value for your goods, you could be importing your own goods, renting or leasing goods. Where Method 1 – transaction value can’t apply then there are 5 other valuation methods they are:
- Method 2 (transaction value of identical goods)
- Method 3 (transaction value of similar goods)
- Method 4 (deductive method - based on UK sale price)
- Method 5 (computed value – cost of production of the imported goods) and
- Method 6 (fall-back method – any reasonable method if all five proceeding methods can’t be used)
The valuation methods must be applied in order (apart from Method 4 and 5 which are interchangeable). To decide your valuation method, any previous methods available must be clearly discounted with a sound rationale to arrive at the methodology you wish to use. It can often be complex to pick the correct value and therefore, we always recommend getting an expert opinion. It may also be prudent to get a valuation ruling from HMRC to give absolute certainty your methodology is complaint with legislation.
Misunderstanding the Customs rules of origin
Both the EU-UK Trade Cooperation Agreement (TCA) and the UK’s other third country Free Trade Agreements (FTAs) provide the opportunity for duty-free movement of goods between the signatory territories. However, to qualify for duty-free movement, your goods must meet the relevant ‘rules of origin’ set out in these agreements.
The rules are designed to prove that the goods originate or have preferential origin in the territory from which they are exported to the importing territory – but there are different rules of origin depending upon the customs classification of the goods. It is important to remember that the rules in the TCA are not always the same as the rules under other FTA’s.
In order to claim preferential origin and a lower rate of customs duty upon import into the UK, certain requirements must be met i.e. a certificate or origin from the exporter or a specific statement of origin from the exporter/supplier on their invoice to you. Not having this evidence can lead to HMRC invalidating your claim to preferential origin and raising an assessment against you as an importer.
Our expert Customs team can undertake an origin review of your products to establish if they meet the relevant rules of origin from both an imports and exports perspective. We can also help you build the correct supporting evidence to meet HMRC’s requirements for customs declarations, and design and implement internal controls and procedures to allow your business to monitor, review, update and control your customs procedures.
Customs Incoterms - not understanding how they affect your supply chain
Many companies are still not fully aware of the specifics of incoterms and what the difference between the various terms mean for their business and supply chain. We commonly see businesses getting into difficulties by:
- Not clearly understanding the difference between Delivery Duty Paid (DDP) and Delivery at Place (DAP)
- Not realising which incoterms are actually being used
- Entering into sales contracts with EU customers 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.
Lack of understanding in this area can lead to incorrect declarations causing delays and difficulties that cause poor commercial relations with customers/suppliers. Read our full expert guidance on incoterms here.
Supply chain changes
When you change suppliers, this can have a significant impact on your 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 goods classification may be different (if different raw materials are involved) – all these could alter the customs declarations that are needed and the amount of customs duty and import VAT due on import of your goods.
Before changing suppliers or the country you source your goods from, it is beneficial to undertake a customs sourcing exercise to ascertain if your new proposed supplier and supply chain is more cost effective through a tax lens.
Not checking your paperwork
Even if you have contracted out the submission of your customs declaration to a third-party freight forwarder or customs broker, legal liability for the accuracy of the complex customs data entered onto your customs declaration and compliance liability remains with your company. In other words, your business is responsible to HMRC for errors made in your name by your appointed freight forwarder/customs broker.
In our experience, many companies either:
- Do not receive copies of their customs declarations from their freight forwarders/customs brokers for review.
- Or, if they do, do not carry out sufficiently detailed and accurate management checks on a large enough sample of customs declarations to identify errors.
A customs declaration is a tax return, and not reviewing your tax return for errors is not advisable. If your business is within the Senior Accounting Officer (SAO) Regime, you must be able to sign off your certificate saying that you have appropriate management controls over your customs duty and import VAT accounting.
Often businesses do not realise the growing risk and only become aware when HMRC undertakes a customs audit on them.
We recommend the use of our Customs Data Analytics Tool to all importers and exporters covered by the SAO regime or that are not comfortable that they are reviewing their declarations appropriately.
No technical back-up
Pressure to fulfil an order and meet delivery schedules often means that you might be tempted to take a chance that your Customs Duty paperwork is right rather than taking the time to get expert advice. We can provide a helpline service for your business, through which we can answer any questions you might have, as and when they arise.
Lack of internal controls
As with all tax documentation, if you don’t operate a review and control system for your customs declarations you may miss systematic errors that lead to large duty liabilities being built up over time.
We can offer an external review of your Customs declaration data to identify potential risks and errors in your declarations to ensure that these can be corrected before Customs decide to visit your company to carry out a detailed audit.
For bespoke support or further details on any of the above points, please do not hesitate to contact Matthew Clark, Stephen English or Juliet Wallwork.
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