A myriad of blows for HMRC

07 August 2009

The House of Commons Public Accounts Committee Report about the Control and Facilitation of Imports and the effects on your business.

HM Revenue and Customs (HMRC) was recently the subject of two scathing reports about its performance in the control and facilitation of imports. The House of Commons Public Accounts Committee published a report (“the Report”) following a report by the National Audit Office that was highly critical about a number of failings in different areas by HMRC. Members of the committee went so far as to describe “a chaotic picture”, describing HMRC as “an absolute shambles”, “an organisation lost in a morass that it cannot control” and “an appalling catalogue of mismanagement and a laissez-faire approach”. This is a worrying situation when businesses require certainty, reliability and consistency to survive in today’s uncertain economic climate.

This paper will offer a brief summary about the Report specifically in relation to business needs and obligations when importing goods into the UK.

Facts

In 2007-2008, HMRC processed some 22 million import declarations from 16,000 traders, accounting for over £186 billion of goods imported from outside the European Union. It collected £2.5 billion in Customs Duty and £19.3 billion in import VAT.

HMRC is responsible for controlling and facilitating the import of goods. Essentially it has to balance two sometimes conflicting goals. On the one hand, HMRC must ensure that trade is facilitated and is disrupted to an absolute minimum, however, on the other hand, the globalisation of trade and in particular the rising threat of international terrorism means that security issues are paramount on the agenda. The two reports in question analysed HMRC’s ability and competence in balancing these goals.

Trade Facilitation

Businesses involved with importing goods into the UK (EC) will know that Customs Law is a complex area of Indirect Tax Law. There are:

  • 16,000different goods classification codes that define the level of duty payable.;
  • 49 Articles governing the customs valuation of goods also thereby determining the level of duty payable;
  • Rules of Origin, the Generalised System of Preferences and various trade agreements also determine the level of duty payable for imported goods; and;
  • Thirty different regimes that traders can use to defer or reduce payments and thirty four categories of prohibited and restricted goods.

However, simple errors can lead to demands for large back duty payments, the imposition of penalties and businesses being precluded from using customs duty relief schemes for up to three years.

The Role of HMRC

As well as collecting revenue, HMRC is there to help traders comply with these complex rules and this is where the problems arise.

Audits and the lack of quality information from HMRC

HMRC employs an audit-based system of customs control. However, the report highlighted traders concerned about the quality of information being received from HMRC. Traders have been put in the situation where an audit has been carried out and deemed to be “successful” only for errors to be discovered in subsequent audits, which result in back duty demands. HMRC considered that duty could not waive demands for back duty if errors occurred because it is legally obliged to collect these amounts and pass them to the EU Commission.

Furthermore, the Report highlighted that HMRC’s staff lacked an understanding of the industry sector or the skills and knowledge to carry out customs checks, thereby increasing the burden on traders. HMRC recognised that at the time of the National Audit Office study, some of their staff were new to customs work.

Who is being audited?

From 2005-06 the number of audits of the largest traders fell by 51% from 377 to 188 and the associated revenue yield from these audits decreased by 67% in real terms to £36.4 million (an average of £194,000 per audit). Fewer than 1000 large traders account for half of the total imports of non-EU goods. Between 2005-06 and 2007-08, the number of HMRC audits of small and medium sized businesses also fell by 42% from 15,800 to 9,130. HOWEVER, the revenue from these audits increased by 14% in real terms to £141.4 million (an average of £15,500). Over the three years, the rate of errors identified in these audits increased from 32% to 39%.

New Businesses

The error rate found in audits of new traders increased from 32% to 47% between 2005-06 and 2007-08. HMRC has committed however to contacting all new traders within their first year which it admirably is on track to achieve. However, new businesses require stability and continuity especially in their formative years. Any back duty claim may be fatal to their survival prospects.

Conclusions

Both the House of Commons Report and the National Audit Office Report both highlighted that customs rules set out by the EU are overly complex though the Modernised Customs Code and the forthcoming Implementing Regulations should simplify the whole process. However, the report has highlighted a number of problems on top of the complexity of the rules, including:

  • Even where a company has been subject to a successful audit, HMRC have on occasions returned and found “errors” and have subsequently issued back duty payment demands.
  • Some staff at HMRC do not have the experience and industry-knowledge of the industries that they are auditing.
  • The increase in revenue from small to medium businesses as compared to the drop in revenue from large companies suggest a strategic realignment of HMRC’s policies as smaller companies are often more exposed than larger companies to the nuances of Customs Law.

Large businesses face a number of new challenges including the imposition of penalties on Senior Accounting Officers for insufficient customs systems and procedures and pressure from a corporate governance perspective to acquire AEO status. (See Papers “AEO – A Customs World of Haves and Have Not’s“ and “Customs Obligations for Senior Accounting Officers under the Finance Act 2009”)

It is clear that SME’s are also facing increasing demands due to the refocusing of HMRC’s targeting.

How can ITS help you?

ITS has over fifteen years experience in the sphere of Customs Law. We have expert knowledge not only in the legislative nuances of Customs Law, with extensive material and access to specialist legislative and legal data but also our client work has enabled us to develop industry-specific expertise that is so lacking according to the Report.

For a free first meeting or for a copy of either report (or both) contact us at mail@internationaltradesolutions.co.uk or call us on +44 (0) 1905 619229.

 

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