Surviving a Customs Audit:

29 July 2011

Following recent developments in international trade, the Customs Audit is now taking on even more significance than before. It is your responsibility to ensure that your systems and processes are robust and thus minimise the risk of compliance failures.

Importers customs compliance is subject to audit-based control with customs declarations remaining open for three years. Any errors can lead to:

• Collection of underpaid customs duties
• Penalties
• Removal of duty relief(s)
• Delays in clearance of your goods

With the introduction of the Finance Act provisions on Senior Accounting Officers and the upcoming integration of the Authorised Economic Operator (AEO) system the customs audit takes on even more significance than it did before.

HMRC has recently been subjected to savage criticism over its control of customs matters and audits and as a result, we are likely to see a refocusing of their efforts in this area.

This paper will briefly explain what an HMRC audit officer will be looking for during an audit, the ‘classic’ risks that you may be exposed to and the ways in which ITS can help you to ensure that your audit passes swiftly and smoothly.

What will the Customs Auditor look for when they audit your business?

The Customs Audit Officer (CAO) will firstly want to walk through your systems and procedures to see how you manage your legal obligations. They will then look at what information is declared (focussing on the elements impacting your duty costs) and how you arrived at this. They will be looking at the four ‘Building Blocks’ of Customs Law:

• Classification,
• Origin,
• Valuation and;
• Duty Reliefs

The Building Blocks


One of the biggest causes of non-compliance concerns the commodity codes that imported goods have been declared under. The classification of product determines the rate of customs duty you pay but also whether any commercial policy measures such as anti-dumping and licensing applies. If you use customs duty reliefs then these are likely to be restricted to the commodity codes listed in your application and so classification errors can impact this area too. Bearing in mind that there are over 16,000 commodity codes as well as countless European Court of Justice and national classification cases it becomes clear that this area of Customs Law can be extremely complex.

The Customs auditor will look for a number of things:

• Who is responsible for determining your commodity code(s)?
• How did they come up with the codes?
• Do the commodity codes that are declared to customs match the imported goods?
• Do you keep up-to-date with latest developments (ECJ rulings, BTI’s etc)

Origin of Goods

The origin of your products is key is determining whether preferential duty rates apply or whether goods are subject to commercial policy measures.

Although at International and European level there are significant changes afoot, in our experience the origin issue is one of the most misunderstood and problematic for importers. The customs auditors have been instructed to clamp down on origin non-compliance and in particular the issue of preferential origin and the actual certificates of origin themselves.

The auditor will look for things such as:

• Your understanding of the origin rules
• Your internal systems to check the reconciliation between the imported goods and those stated in the proof of origin
• Your transport documentation to see if you have complied with the “direct transport rule”
• Documentation to see if the country of dispatch matches the country of origin


The customs regulations set out various methods for determining an appropriate customs value. The inherent risk when declaring a valuation for import (or export) is that the valuation is incorrect. The goods in question run the risk of either being undervalued (and therefore not enough duty is paid) or they may be overvalued (in which case too much duty may be paid).

The Customs Code provides for additions to (freight and insurance costs) and deductions from (buying commissions and finance charges etc) the valuation.

The auditor will check for a number of things:

• Are you related to your suppliers and if so does this relationship affect the arms-length value of the goods?
• Are the imported goods subject to a sale (or series of sales)? If there is no sale then an alternative method of valuation must be used (e.g. consignment stock, free samples, transfers to branches etc.) If there are a number of sales in the supply chain then is the correct one used?
• What are your contractual terms with overseas suppliers and are there any additions or deductions that have to be made to the invoiced price to arrive at an acceptable value
• Do the values declared for customs purposes accurately reflect what is paid to the suppliers? Are there robust internal controls and value reconciliations in place?

Customs Procedures

At a basic level, HMRC will expect to see clear ownership of this issue and some basic checks and controls to ensure declarations are made correctly.

The auditor will look for a number of common themes that overlap onto all of the different procedures such as:

• Examining the terms of any authorisations and whether your business meets these terms?
• Examining your internal systems and record keeping to ensure there are robust procedures in place that are aligned with your obligations and authorisations
• Examining the internal structure of your business to establish where responsibility, accountability and control lie?
• Examining your internal systems to ensure there is traceability from import through to export/processing and examining whether your records reconcile with the figures declared?

New customs regulations are driving the requirement to have all procedures documented and with a clear focus on the checks you carry out to ensure compliance and how you will resolve any issues you identify.

Documentation Requirements

HMRC will want to review a sample of import transactions and we recommend you put together the following packs:

• Vendor invoice
• Packing List
• Customs Declaration (C88)
• Customs Acceptance Advice (E2)
• Shipping Documents
• Evidence of how the import is entered in to your accounts
• Evidence of how the import is entered in to your stock records
• Evidence of payment

All documentation relating to a customs entry must be kept for a minimum of four years. HMRC will take a dim view of your ability to comply with the customs regulations if you cannot pull this information together.

How can ITS help?

International Trade Solutions has extensive experience with in all areas of customs law. We have helped numerous clients develop robust procedures following a comprehensive customs review. Our clients have not only improved their customs compliance rating with HMRC but they have also saved millions of pounds in duty reclaims. Our extensive technical database gives us access to key ECJ and other court rulings as well as BTI decisions and latest developments in all areas of customs law and international trade. We strongly recommend that businesses review their customs practices as building a robust process will become a necessity for all those involved in international trade. Those that fail to do so will be jeopardising the future of their businesses.

For latest updates visit our website: or to arrange a free first consultation meeting call us on (01905) 731622 or alternatively email us on:

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