Where does responsibility for customs risk management and strategic planning rest in your company?  How confident are you in meeting the customs obligations?

Many businesses delegate customs management to third party freight forwarders or junior staff in their logistics function, presumably on the basis that HM Revenue & Customs checks will identify any serious errors at time of import.

However, importers cannot rely on HM Revenue & Customs to work with you to keep your customs functions compliant.  A National Audit Office (NAO) report in to HM Revenue & Customs control of non EU imports released in November 20081 highlights some alarming points, including:

• Only about 2-3% of consignments are subject to any meaningful checks, and even then these checks are subject to a 16% error rate;
• Only 5% of businesses receive any audit visits in any year
• Although the number of audits is down (by 51%) the number of errors and duty collected as a result has increased

The NAO report supports the inference that small errors are being left to snowball in to material risk exposures rather than being nipped in the bud.

What are the customs risks?

HM Revenue can seek to correct customs declarations made in the last three years, with the following consequences:

• Additional customs duties
• Customs penalties of up to £2,500 per innocent error
• Lengthy, time consuming investigations
• A poor compliance history making it more difficult to obtain future trade facilitative measures, which puts the business at a possible disadvantage
• The risk of an investigation and penalties under the money laundering regulations, as customs errors are still on the statute book as strict liability offences (s167(3) Customs Excise Management Act 1979) and businesses could be seen as enjoying criminal proceeds if underpaying duty

All of these consequences could have a significant impact on bottom line profitability and credibility of the company.

An example of the risk businesses face is highlighted by HM Revenue & Customs approach to a small error in the application of one of customs best known duty relief schemes, Inward Processing Relief (IPR).  IPR allows authorised businesses to claim duty relief on imported goods which are subsequently exported out of the EU after processing.

A large number of businesses have been hit by duty demands going back three years because their freight forwarders did not know the goods being exporting were IPR goods, and as such they failed to quote the appropriate customs procedure code in one of the 54 boxes of the customs declaration.   HM Revenue & Customs raised duty demands to recover customs duties even though the companies were able to prove the goods were in fact exported. This led to one importer being subject to additional duties of £31,568,858.632.

A number of other technical developments are coming through the pipeline that have the potential to cause similar results such as royalties relating to imported products, related party transactions and incorrect exports from customs warehousing.

Businesses are going to have to take increasing responsibility for customs compliance or risk substantial duty demands.

What should businesses do to exercise responsibility?

We recommended business take the following steps to protect against the risk of retrospective additional costs and gain greater certainty of future costs:

• Map your current customs procedures and determine types of customs transactions;
• Document the customs obligations relating to these customs transactions, this is particularly important if you operate any relief schemes;
• Document how your business determines the key elements setting your duty costs (including the classification, origin, customs value) and check your approach meets the customs rules;
• Allocate and schedule key tasks, reasonability, deadlines (who will deal with any HM Revenue & Customs audit or investigation, who will manage operational issues etc.);
• Establish KPI (such as duty paid, effective rate, amount of duty saved under each planning scheme, % of transactions checked etc.) and appropriate management reports;
• Provide clear instructions to any third parties involved in your customs compliance (suppliers, freight forwarders etc.);
• Ensure you are getting all information & documentation needed to meet audit based controls and provide management information (including all customs declarations made by third parties etc.);
• Determine how your customs function will capture any business or technical customs changes to remain current (e.g. periodic check lists, subscriptions to technical update services etc.)

Many of you will be aware of Authorised Economic Operator (AEO)3.  This regime provides a formal structure for taking responsibility for customs risk management and also offers some additional benefits.  Over time we believe AEO will become the norm for those engaged in international trade and some businesses will see this as the catalyst they need to build robust customs compliance functions.

Please let me know if you would like to receive a copy of the NAO report or if you would like to discuss any of the matters set out in this article.