HM Customs Attack

Cupid Limited imports £500,000 of brass valves each year from China for onward wholesale to the big DIY stores. It has just signed a four year deal to supply one of the biggest players with an additional £250,000 worth of valves but margins will need to be squeezed, a mere 3.5%!

Cupid is importing the valves under a preferential trade arrangement known as the Generalised System of Preferences (GSP) which means the goods enter the EU free from customs duty. It ensures that all the appropriate documentation is being sent with the goods to support the use of GSP and that the import declarations are correctly made by its freight forwarder.

Meanwhile, unbeknown to Cupid, the EU has sent a mission over to China to check that the goods do in fact qualify for this preferential treatment. In order to benefit, no more than 40% of the ex-works value of the valves must be sourced from non-Chinese originating materials. An audit reveals that none of the exporters meet the origin rules as the brass is coming in from Australia.

The EU informs UK Customs who identify all importers of the brass valves from their records and sends out demands for the underpaid duties going back three years using the full rate, which is 6.5%. It also informs the UK importers that GSP will not be available going forward. These steps are taken even though the Chinese government and suppliers are completely to blame. Cupid receives a duty demand for £97,500. It is also locked into a contract for four years which will realise a loss of £22,500.

Cupid could have protected themselves from retrospective duty demands by implementing certain prescribed checks, known as the good faith provisions. It could also have included something in its contracts with the suppliers and customers to entire it did not get locked into loss making contracts.

A little up-front advice could have saved Cupid £120,000 but they never took advice because they don't pay duty.