A concerted and well-managed focus on customs planning can drive down the costs of a business as well as potentially receiving a cash-flow boost from duty reclaims.

Many FD’s see any investment in customs planning as a discretionary spend that can be put off until a later date.  However, poor (or no) customs planning will increase costs exponentially and will significantly increase the risk of failing an HMRC audit in the future (with all the potential consequences that that may bring.)
Below we highlight ten classic ways of reducing your customs costs.

(1) Re-classifying your goods

Correctly classifying your goods is one of the most important responsibilities of the importer. The customs duty that you pay is determined by the classification and origin of your product. Rates vary from 0-217% for imports into the European Union (the average rate is around 4%).
Below are three legitimate ways that you can use the Customs Tariff to reduce the import duty that you pay. And a way f locking in your savings and achieving certainty.

Correcting the code

The EC Customs Tariff contains over 16,000 different commodity codes and in some cases the difference between them is extremely fine. For example:

• Dolls of mythical creatures attract a lower duty rate than dolls representing humans and;
• Wet noodles (in water) attract a lower duty rate than dried noodles.

Reviewing the classification codes that you use could provide your business with significant material savings.

Stripping down Kits

Assuming that your imports are correctly classified to the code attracting the lowest rate, you may have a further opportunity to reduce your costs by stripping down your imports into kits to achieve a more favourable net duty rate. For example:

A stereo turntable attracts duty at 2% but the stylus, which is a high value item, could be imported free of duty. Presenting the stylus separately and fixing it to the turntable after import would reduce any import costs.

Building up Kits

Instead of removing parts to gain the best advantage, you may alternatively present various components at the same time in an unassembled kit form if the finished kit attracts a lower rate of duty than the individual components. For example:

Parts used to make digging machines are subject to duty whereas the finished digger could be imported free of duty. Presenting an unassembled kit of parts could, under the customs classification rules, result in the kit being classified as finished machine and realise material duty savings.

Locking in your classification Savings

The three methods above highlight some of the ways that a business can save money through classification. However, if you want to seek certainty from the authorities then you are able to apply for a BTI.

Seeking a BTI

If you are unsure about which code to classify your goods under or you have good grounds for disagreeing with a code offered to you by HMRC, you are entitled to seek a Binding Tariff Information ruling (BTI). A BTI ruling is binding upon the competent authorities of all European Member States under the same conditions. Therefore, a robustly argued application for BTI could result in the authorities agreeing with your argument, thus saving your business money.

(2) Using Trade Agreements

One of the aims of the EU is to increase global trade and in particular to increase trade with less-developed or developing countries. As such, the EU has entered into trade agreements with hundreds of countries which may attract a reduced or nil rate of duty for your imports. For example:

The ‘Everything but Arms’ arrangement (EBA) allows duty-free, quota-free access for all products originating in the 50 Least Developed Countries

Occasionally, more than one agreement will apply to your goods and you need to make sure you are getting the most favourable rate.

Be aware that various conditions must be met before you can benefit from Trade Agreements, the key one being that your goods must ‘originate' in the partner country.

Working out whether your product meets the origin rule is often complex and can lead to errors.

You may have put you off using this type of planning in the past because the authorities frequently challenge the use of Trade Agreements and seek to recover your duty savings going back three years. However, there are now specific steps you can take to protect any benefits you obtain.

Even if you think you are benefiting under Trade Agreements, we advise you to get someone to check your imports on a regular basis. If the supporting documentation is not available when your goods are imported, then your agents may not know of the potential claim and pay the duty on your imports at the full rate.

(3) Deducting qualifying items from the customs value

When declaring a customs value to the authorities (i.e. the value that you pay duty on) the Customs Code provides that you must include certain ‘additions’ such as freight and insurance costs, certain royalty payments etc. Conversely, the code provides for certain ‘deductions’ from the customs value (i.e. elements that you do not have to include), this includes buying commissions and certain finance charges etc.

Deducting elements will require you to take positive steps to prove that all the required conditions are met. The cost of this though is more than covered by the potential savings for your business.

It is worth reviewing your supplier agreements to ensure you are taking full advantage of these options and, if you are not, implementing changes going forward to reduce customs costs without necessarily affecting the amounts you pay. Until recently, it was not possible to apply these valuation deductions retrospectively. However, a European Court of Justice Decision has now opened up the way for you to make duty reclaims in certain circumstances.

(4) Prior Sale

In cases where you are buying from intermediaries rather than a manufacturer and there is a chain of sales before import, you may be able to elect an earlier sale in the chain as the basis for customs duty and strip out any subsequent mark-ups from a charge for duty. This is known as ‘prior-sale planning’. For example:

Company A (a non-EU company) produces a product to EC specifications and sells the product to Company B (also a non-EU company) for $100. Company B then sells to Company C (an EU company) for $200 and the goods are imported and Company C pays the duty on the $200 value.

However, under the prior sale rules, as Company A manufactured the goods to EC standards, Company C is permitted to declare the $100 first sale as the value on which the import duty can be paid.

Applying this planning will not affect the amounts you pay for the goods. However, certain conditions apply, including having access to the earlier sales price, proving the earlier sale took place with intention to export the goods the European Union and tracing transactions through the supply chain. Also, please be aware that prior sale is “under threat” and may be phased out under the Modernised Customs Code. However, until the new Implementing Regulations are agreed upon, prior-sale will remain in place.

(5) Inward Processing Relief (IPR)

Inward Processing Relief (IPR) allows you to claim duty relief on raw materials, components and goods imported for processing which are subsequently sold outside to the European Union. Processing in this context could include you inspecting and repacking the goods through to complex manufacturing. For example:

Company A imports motors from outside of the EU which it then installs into washing machines. The washing machines are then sold outside of the EU. Company A is entitled to duty-relief (suspension or drawback) on the imported motors.

You will need to obtain authorisation to benefit from IPR and, in some circumstances, you may be able to get retrospective approval going back one year or to the date of a previously lapsed authorisation. You will also be taking on certain additional obligations, although if you invest properly in setting up the procedure these requirements can be streamlined.  There are a number of instances of the customs authorities seeking to claw back relief where the importer or his agents have failed to comply with administrative conditions.  We recommend you pay particular attention to business and regulatory changes in this area. If you are already operating IPR than there are various ways to increase the benefits you enjoy through small changed to rates of yield, scrap provisions, qualifying disposals etc.

(6) Duty Relief on Re-imported Goods

Once you export your goods outside the EU they lose their EU status and will be subject to duty on re-importation. Outward Processing Relief (OPR) allows you to claim total or partial relief on goods you send outside of the European Union for process or repair. Like IPR (above) you will need to obtain an authorisation to benefit from OPR.
For example:

Company A sources fabric from the EU and sends it to China for cutting and manufacturing. The garment is then re-imported into the EU. Company A is therefore entitled to duty-relief on the imported garment.

Returned Goods Relief (RGR) will enable you to import goods previously exported where they are re-imported in the same state within three years. This can apply to goods rejected and returned by your overseas customers.

(7) Processing under Customs Control

Processing under Customs Control (PCC) allows for materials and parts to be imported into the European Community where they are then to be "processed" into a finished or semi-finished product. The parts and materials are declared under the same commodity code as the finished product itself, thereby potentially saving money on Customs duty, agricultural levies and other CAP charges when the goods are declared to free circulation. For example:

Company A sources hundreds of parts from outside the EU for manufacture into a mechanical digger. Rather than paying import duty on all of the parts, Company A declares the parts to PCC and then pays duty on the finished product when it is declared to free circulation.

(8) Customs Freight Simplified Procedures

Customs Freight Simplified Procedures (CFSP) allows importers that are authorised to accelerate the removal or release of most non-EU imports from the border by making a simplified declaration containing the minimum of details at the frontier. For example:

Company X employs freight forwarders to make its customs declarations on its behalf at a cost of £35 per import. It makes 1000 imports per quarter which leaves a total annual cost of £140,000. Implementing (and monitoring) Customs Simplified Freight Procedures (CFSP) for example, will cost a fraction of that and will allow for a business to implement more robust controls that can be used across the entire business.

If one takes into account that the new conditions for achieving (re)authorisation for CFSP are ¾ of the way to obtaining an AEO Customs certificate then it is obvious that strategic investment into customs planning can indeed deliver real return on investment.

(9) Cash Flow Planning

By default, your imports are subject to customs duty and import VAT at time of arrival in to the European Union.

If you are a regular importer then you probably pay your duty and import VAT using a deferment account, which gives you a cash-flow advantage of up to six weeks.
Implementing customs warehousing can give you further cash-flow advantages by deferring the customs and import VAT point until call off from the warehouse (which could be a physical building or virtual system) and delaying payment of your customs duty and import VAT until the 15th day of the month following call off.

(10) Applying for a Duty Suspension

An alternative option available to reduce costs is to apply for an Autonomous Duty Suspension the European Commission for a particular product. However, this is arguably one of the most political areas of customs law and an application should not be made without strong research, robust drafting and patient negotiations with (potential) objectors. For example:

Company A imports a specialised electric fan for use in the manufacture of computers. The fan cannot be sourced from within the EU and the duty-level savings per annum equal EUR 100,000. Company A applies for an autonomous duty suspension and after long and patient negotiations the fans are included in the list of products that are available to be imported duty-free.

Contact ITS for more ways of cutting your customs duty costs

Your business is constantly under pressure to reduce costs. Customs planning may provide you with a great low risk opportunity to realise cost savings.

The planning ideas outlined above are just a sample of the opportunities available to you to reduce your customs duty costs, sometimes with retrospective effect. We have developed a database of over 170 such ideas based on experience of hundreds of our clients over the last 15 years and would welcome the chance to discuss these with you. Please note that failure to meet your customs obligations can result in additional duty demands and penalties going back three years. We take great care in implementing customs planning to all but eliminate these risks. Our approach includes gaining specific approval from the authorities wherever possible, working with you to implement robust procedures and providing ongoing support.