Quantifying Customs Risk: Customs Penalties

20 September 2011

Businesses thrive on certainty and are keen to understand the risks of customs compliance failures. This understanding can help formulate appropriate procedures and controls within a business.

Customs penalties do not flow from the same regulations as other taxes and many businesses are struggling to quantify these risks. This paper gives an overview of all the risks and then focuses on the current penalty regime.

Customs errors can result in:

• Collection of any underpaid customs duty going back three years
• Delays in customs clearance

• Seizure of goods• Time consuming investigations
• Fines for Senior Accounting Officers (usually the FD) for companies with turnovers over £200m
• Money laundering offences
• Preclusion from customs facilitative programs such as Authorised Economic Operator (AEO)

• Increases to a company’s overall tax risk score• Exposing overseas customers to additional duty demands and penalty action if issuing incorrect origin statements• Customs penaltiesIn our experience, HMRC are likely to demand payment of any underpaid customs duty. Many of the other risks, except customs penalties, are only experienced in a handful of cases.

Customs penalties are set at national level and differ between all 27 member states of the European Union. This article focuses on the penalty position in the UK. The Finance Act 2003 introduced civil penalties for customs errors. However, criminal sanctions still exist in the Customs & Excise Management Act 1979 (CEMA) and need to be understood.

Criminal Penalties

The key criminal penalty provisions in CEMA are:

• Making untrue customs declarations (s167)
• Counterfeiting documents (s168)
• Fraudulent evasion (s170)

The penalty for making untrue declarations is split between “knowingly or recklessly” and the strict liability offence which requires no intention at all. It is this strict liability offence that has the potential to cause businesses real problems because it opens the door for innocent mistakes that result in under-payments to give rise to money laundering offences.

Penalties for untrue declarations are now pursued exclusively through the civil penalty regime set out below. It is hoped that the current process to modernisation of CEMA removes s167 from the statute book and closes this disproportionate and unfair exposure to money laundering offences.

Fraudulent evasion of duty clearly requires intention and the need for the authorities to prove the offence beyond reasonable doubt. The offence is punishable by imprisonment of up to 7 years (10 years for weapons and 14 years for nuclear material) and penalties of any amount! It is unlikely that any change to the customs regulations will result in the removal of this provision but HMRC reserve any pursuit under Fraudulent Evasion to the most serious of crimes, preferring to take action under the civil evasion penalty route.

Civil Penalties

The civil penalty regime was introduced by the Finance Act 2003 (FA 2003) and covers evasion and cases of contravention of customs rules.

Civil Evasion

The penalties for evasion are set out in section 25 of the Finance Act 2003. A person who engages in any conduct for the purpose of evading duty and his conduct involves dishonesty will be liable under this section. Penalties for civil evasion can give rise to a penalty of an amount equal to the duty evaded or sought to be evaded.

Therefore, dishonestly classifying goods to a commodity code that attracts a lower rate of duty, claiming preference when the origin rules are not met, leaving dutiable elements out of the customs value, claiming a duty relief of reclaiming duties already paid etc. can result in civil evasion penalties.

The civil evasion penalty can be on either the company or the dishonest individual if that person is a Director or managing officer.

More information on civil evasion penalties can be found in HMRC Notice 300.

The instigation of civil penalties will usually begin with HMRC asking you to attend a meeting with them and we would recommend you contact us immediately. The HMRC officer will outline that they are not seeking a criminal prosecution.

Contravention of Customs Rule (Any Errors)

Any error can result in a penalty under this section. As such is captures innocent mistakes and recklessness. Different penalties are prescribed for different contraventions and a full list is set out in Customs (Contravention of Relevant Rule) Regulations 2003 and Export (Penalty) Regulations 2003. The maximum penalty under this section is £2,500 per contravention but many offences incur penalties of £1,000.

A business will not be liable for a penalty under this section if he satisfies HMRC (or the tax tribunal) that there is a reasonable excuse. None of the following is considered as a reasonable excuse:

• Insufficient funds to pay the duty or the penalty
• Reliance being placed on another person to perform the task (e.g, the freight forwarder)
• The contravention is attributable in whole or in part to the conduct of a person on whom reliance to perform the task was so placed

Typical reasonable excuses include compassionate circumstances, computer breakdown, loss of key personnel, and loss of records.

Where a penalty demand is given under this section no proceedings may be brought against that person for a criminal offence because of that conduct. This is also the case if the demand is subsequently withdrawn.

For the vast majority of contraventions a penalty will not be charged unless HMRC has issued a warning letter for a broadly similar irregularity in the last two years. However, HMRC’s position is that they may issue a penalty without a warning letter where:

• The customs debt is £10,000 or more
• Where the importer have been given written instructions or guidance by HMRC and fail to adhere to those instructions

HMRC policy is usually to issue a penalty of £250 for the first penalty and then increase this with each subsequent contravention (£500, £1000, £2000, £2500). Where errors are serious then they may skip straight to the maximum penalty (e.g. over £100,000 in underpaid duty).

Where they discover errors during an audit they will penalise each error separately but at the same rate. They may make an exception where precisely the same error is repeatedly and regard these as a single error.

Further information on civil penalties for contraventions of customs law can be found in HMRC Notice 301.

HMRC is seeking to increase the potential penalties it can issue for contravention of rules, including issuing penalties where a contravention continues to be made.

Reduction of Penalties

Where a person is liable for a penalty under either civil evasion or contravention of rule provisions it may be possible to reduce that penalty (including to nil). A penalty will not be reduced solely on the basis that:

• There are insufficient funds to pay the penalty
• There has been no significant loss of duty
• The person acted in good faith

Factors that can give rise to a reduction include voluntary disclosures, co-operation (attending interviews, supply information promptly, answer questions truthfully, give relevant facts to establish the liability etc.).

HMRC practice is to reduce the penalty by:

• 40% for early and truthful disclosure
• 40% for full co-operation

Therefore the maximum reduction is normally 80%. HMRC is likely to offer 100% reductions of any penalties where there is voluntary full and unprompted disclosure. As part of any review for our clients we look establish whether there are any errors and advise on voluntary disclosure to mitigate any compliance risks.

Conclusion

Customs errors can result in significant additional costs to a business. Carrying out regular reviews to find, correct and making voluntary disclosures of any errors enables businesses to mitigate the risks of penalties and ongoing errors that could erode margins.

Businesses can also mitigate risk by seeking advice when unclear about the customs treatment of any imports. The key areas that must be managed correctly include:

• Customs classification
• Determining the customs origin of goods
• Customs valuation
• The use of customs duty relief schemes
• Documentation and records

Businesses also need to understand the new rules requiring for robust documented procedures and controls being brought in because of Senior Accounting Officer provisions (for companies with turnovers of £200m plus) and Authorised Economic Operator AEO) programs.

Finally, if penalty action is likely to result then there are options open to businesses to mitigate these demands (up to 80%) by being proactive and working with HMRC.

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