"Square pegs, round holes or round pegs, square holes?"

Why is it important to correctly classify my goods?

The correct classification of imported goods is one of the most important responsibilities of any importer. The liability of goods to customs duty and the rates of duty to which they are subject depend on their tariff classification. Tariff classification is also used to determine whether a number of non-tariff measures such as import licensing, anti-dumping duties and import quotas apply.

Duty rates vary from 0-217% with an average rate of 4% for imports in to the European Union. Reclassifying your products to commodity codes attracting a lower or nil duty rate can generate enormous savings for your business. On the other hand, in the UK, any mistake you make can result in HMRC 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.

How difficult can it be to classify my goods?

There are over 16,000 different Commodity codes and sometimes the boundaries between them can be minute and can cause you significant difficulties in meeting your legal obligations and determining your landed costs. For example:

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

One of the big issues at present in front of the courts is the issue of classifying products that can be used for more than one purpose for example photocopiers with scanning and faxing capabilities, mobile phones with built in cameras, etc.

The customs tariff also struggles to keep pace with innovation. It typically takes 10-15 years to update the tariff so that the headings and notes may be ambiguous or even dated and unsatisfactory for today's purposes. (See for example article "Classification of LCD "dual-use monitors" on the Latest News part of our website).

The ECJ regularly deals with classification issues ranging from what type of garment constitutes a "nightdress" to what type of trucks can be classified as "dumper trucks"? One of the most contentious and difficult issues that the ECJ has had to contend with recently is the issue of whether ink cartridges should be classified as "ink" (thereby attracting a 6.5% duty rate) or as "part of a computer" (thereby attracting no duty)?

The Six Interpretive rules of the CN

Classification of goods in the CN is governed by six interpretative principles or "rules". In most cases it is relatively straightforward to ascertain the correct tariff heading or subheading for particular goods, knowledge of these rules can sometimes be crucial for the correct classification of goods in order to avoid not only the underpayment of duty but also overpayment. A simple breakdown of the rules can be seen below:

Rule 1 is the Grandfather provision and states that the titles are there for ease of reference only. Classification shall be determined according to the terms of the headings of any relevant section or chapter notes. Most classifications are settled using this rule.

Rule 2 (a) is concerned with the classification of incomplete and unfinished articles and whether they can be presented in the same way as complete or finished articles. For example, a kit of bicycle parts is likely to be classified as a finished bicycle rather than in various classifications such as a chain, seat, frame, bell, light etc.

Rule 2 (b) is concerned with goods which are made up of a mixture and combination of items, for example sangria.

Rule 3 deals with instances where goods could be classified under more than one classification. Rule 3 (a) states that the heading which provides the most specific description should be preferred unless both (or all) are equally specific. If the goods cannot be classified under rule 3(a) then 3 (b) states that goods should be classified as if they consist of the material or component which gives them their essential character. This rule is commonly used for sets put together for retail sale and was decisive in the printer ink cartridge cases at the ECJ.

Rule 3 (c) states that if goods cannot be classified under 3(a) or (b) they should be classified under the heading which occurs last in numerical order amongst those which equally merit consideration. This is effectively a tie breaker rule.

Rule 4 is concerned with goods that cannot be classified in accordance with the above rules and is rarely used

Rule 5 (a) and (b) deals with packing materials and

Rule 6 clarifies how goods should be classified within sub-headings of headings. Customs classification is hierarchical in the sense that you classify goods at four digit level, then six and so on until you have the full 10 digit code. Alternative classifications should only be compared at the same level, i.e. a six digit-code should be compared against a six digit-code and not against an 8 digit code.

What if I don't know which Classification heading to classify my goods under?

In cases of uncertainty, the customs regulations provide a mechanism for an importer to seek a Binding Tariff Information (BTI) which the customs authorities are legally bound to give (for more information on BTI's and the procedure on how to apply for one see White Paper "Binding Tariff Information" on our website.)

There are also provisions in place to appeal against a BTI to HMRC or even to a Tribunal that may refer the issue to a national court which in turn may refer it to the ECJ for a ruling.

Customs Planning & how we can help you

International Trade Solutions can carry out a review of your operations to highlight any potential classification issues and potential customs duty savings. There are essentially three potential ways that classification reviews can save you money:

Reclassifying your Product

Each product you import should only be classifiable to one specific commodity code in the customs tariff, sometimes presenting you with a very difficult challenge. There have been many cases of importers wrongly classifying their goods and either underpaying customs duty (and later being audited by HMRC and receiving a remittance for the duty that can go back three years in arrears) or conversely overpaying HMRC (although there are provisions to claim excess duty payments back).

We have considerable experience in this area and access to a number of technical resources which enable us to delve in to the meaning and scope of classifications in the tariff schedule. We can benchmark the codes you use against those used by your competitors and businesses in other countries.

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 import 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

You may be able to gain an advantage by presenting 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.

Contact Us

We can provide you with a comprehensive review of your customs operations, including the classifications you use and so highlight any cost savings, reclaims and compliance risks. Furthermore we can build robust procedures and keep you abreast of changes you need to adopt to remain compliant.

We have access to advanced materials such as a database of previously decided cases and explanatory notes to legislation, case law and deep skills and experience of successful classification projects which you can tap in to and increase the competitiveness of your business.

If you have any queries please email us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call us today on 01905 619229 to arrange a free of charge discussion and high-level assessment of your customs risks.