The Shifting Customs Landscape & Its Impact on Businesses
On 1 May 2016 the Union Customs Code (UCC) (Regulation 952/2013) will come in to effect with considerable impact on most businesses involved in importing into, or exporting from, the European Union (EU). Any businesses impacted by the key developments should be preparing now or risk significant increases to landed costs and bank facilities. Many of the actions you need to take will require the involvement of HMRC, whose resources will be stretched to the limit.
This article sets out the characteristics of businesses most impacted, the key changes and what the customs field is likely to look like post change.
Businesses Most Impacted
The businesses most impacted by the UCC will include:
- Any operating customs duty relief schemes;
- Any operating customs warehousing;
- Any paying royalties (e.g. for use of trademarks or intellectual property);
- Any currently using First Sale arrangement to utilise an earlier invoice in the supply chain for customs valuation purposes;
- Any operating Temporary Storage facilities and making use of transit arrangements;
- Any making significant numbers of customs import declarations;
- Any operating in more than one Member State of the EU;
- Any holding Binding Tariff Information (BTI) classification rulings; and
- Any currently authorised for CFSP or AEO.
If you fall in to any of these categories and are not familiar with the provisions in the customs code, it’s implementing and delegating acts, we recommend you contact us as a matter of urgency.
Key Developments under the UCC
Customs Duty Relief Schemes
The current customs relief schemes will be replaced by the following four special procedures:
- Processing (incorporating the following previous reliefs but with changes: Inward Processing Relief Suspension, Processing under Customs Control, Outward Processing relief);
- Use (Temporary Import Relief, End Use);
- Storage (Customs Warehousing & Free Zones); and
Anyone wishing to operate these reliefs will need to demonstrate they have AEO type standards of control (see below), including documentation of processes, checks and controls, clear process to determine and maintain key customs elements such as classification, origin, customs valuation etc. Businesses will also have to provide guarantees for the customs duties on goods held within these relief procedures or obtain AEO Customs authorisation.
The new Processing arrangement will remove the requirement for export and compensatory interest provisions. The duty on goods will be paid at the lower of the duty rate applying to the processed product or the component goods (like PCC) or be relieved if exported.
IPR Drawback will disappear from 1 May 2016, although the duty on goods held under this regime at this date can still be reclaimed in the normal manner.
Those operating end-use relief (under the new Use Special Procedure) will have to submit periodic returns evidencing that the goods have been put to this end use.
We understand the transitional provisions may allow businesses to keep operating existing relief schemes without providing guarantees up until 2018, or whenever their current authorisations run out. This may provide current users a competitive advantage over those applying for authorisations post May 2016.
Sales in warehouse will be permitted under the new Special Procedure for those businesses making internet or catalogue sales.
Care will need to be taken to ensure the customs value of goods do not increase within the warehouse because of sales taking place before the goods are released.
The removal of Type D Warehousing (which allowed the customs value to be fixed on entry to the warehouse) and First Sale Provisions (see below) could result in unintended additional customs costs.
Anyone wishing to operate customs warehousing will need to demonstrate they have AEO type standards of control (see below), including documentation of processes, checks and controls, clear process to determine and maintain key customs elements such as classification, origin, customs valuation etc.
Businesses will also have to provide guarantees for the customs duties on goods held within the customs warehouse or obtain AEO Customs authorisation.
Current customs law requires any royalty payments made by the importer to be added to the customs value where:
- They relate to the imported goods; and
- Are a condition of sale of the imported goods.
The new Royalty Arrangements will significantly weaken the requirement that the payments are a condition of sale of the goods. This change may result in a significant increase in the scope of royalty payments caught by the charging provisions.
Given the relative high value of intellectual property (and as such royalty payments) compared to the value of any underlying physical goods, any new duty demands flowing from this change are likely to be considerable.
We urge businesses to review their royalty agreements and licence fees against these new changes to ensure their impact is understood and, where possible, mitigated.
Loss of First Sale
First Sale customs planning allows businesses to use an earlier sale in the supply chain for the basis of the customs value and so exclude subsequent mark-ups from a charge for customs duty, providing certain conditions are met.
This option has been omitted from the UCC and so customs values will now be based on the last sale taking place before entry of goods to the EU (or free circulation). It may be possible to mitigate some of First Sales impact through timing of sales and the supply chain.
We understand that transitional measures will extend the benefit of First Sale until the end of 2018 if contracts are in place with those suppliers before the implementing regulations are published and so current beneficiaries should take urgent action.
There is also a small chance that the abolition of First Sale will be reversed when the Implementing Provisions are put before the European Parliament.
Reducing Customs Declaration Costs & Support
The UCC introduces two key measures that could generate significant cost savings and compliance costs for businesses, namely:
- Self Assessment enabling businesses to submit a monthly schedule of imports rather than customs declarations for each import; and
- Centralised Customs Clearance enabling businesses to submit customs declarations for all Member States from a single Member State.
We are still waiting the full details of how these options will apply. It is clear that they will only be available to AEO C authorised businesses.
We are advocates of centralising customs clearance or at least its management as it allows businesses to concentrate and build up skills and standardised procedures and master data (such as commodity codes, origin data, valuation adjustments etc). The EU Customs authorities will have increased visibility post 2016 to see how multi-nationals are operating in different EU Member States and so we recommend businesses harmonise these elements now.
Classification Rulings (BTI)
Businesses wishing to gain certainty as to the correct commodity codes for imported goods apply for BTI. Under the current Customs Regulations these bind the customs authorities but not the holder. The UCC will make the BTI binding on the importer too.
Furthermore, there will be a requirement to include the BTI reference on customs declarations for goods covered. We understand this requirement will cause some businesses difficulties as various third parties may hold the rulings (current and ex freight forwarders, overseas branch offices etc.) and a new process will be needed when they are located to allocate them to the customs declarations.
AEO Authorisations- The New Norm
Strong Business Case
AEO authorisations have existed for a number of years but the UK uptake is only 1054 authorisations. Many of these are held by logistics companies and is only about one tenth of Germanys. The key reasons behind our slow uptake include:
- Difficulties in making the business case – authorisation requires a considerable amount of resources (approximately 180 man days) and the current benefits make this investment difficult to justify;
- Lack of Boardroom awareness of AEO;
- Worries over the businesses ability to maintain its AEO Certification as a result of changes in the business and regular changes to the underlying customs regulations.
The benefits for AEO stemming from the UCC are clear and include:
- The need to implement AEOC standards to enjoy and of the Special Procedures (duty reliefs etc.). If a business needs to demonstrate this level of control and compliance, it may as well apply for AEO;
- Reduction in the level of guarantees needed to cover the deferment account – a saving on current practice; and
- A waiver or reduction in the new guarantees required to cover any customs duties suspended under any of the Special Procedures (duty relief, customs warehousing etc.).
The business case for AEO has become much stronger and quantifiable.
The net effect of the new AEO and guarantee requirements is likely to polarise businesses, in that:
- Many of the larger importers will take the decision to embrace AEO and stronger customs management, leading to better risk management, transparency and reporting and enjoyment of trade facilitative measures.
- Small and mid-sized importers may find that the costs and effort involved in obtaining AEO and enhancing their customs compliance outweighs the benefits of the trade facilitative measures. These companies may find it difficult to get their banks to provide the necessary guarantees to cover duty suspended under duty relief etc., and default to clearing all the goods to free circulation.
It will be interesting to see if a new industry steps in to the gap to offer the second group of companies a workable and cost effective solution, such as a bolt on bureau facility with standard processes that dovetail in to the AEO criteria.
What Next – The Missing Pieces
At time of writing, we are still waiting for the implementing regulations (the Delegated Acts and Implementing Acts plus their Annexes) to be finalised. When they are we expect the finished regulations to include:
- The UCC;
- The Delegated Act & Annexes;
- The Implementing Act & Annexes;
- A Transition Regulation; and
- A Regulation setting out the IT Developments.
As such, we will move from two key Regulations to five.
HMRC is planning to issue its revised Public Notices by May 2015 – a tall order as the Regulations are not finished yet. The EU Commission will also release Guidance Notes but not until the Regulations are published.
We understand the current Draft Regulations are now likely to be very close to those finally passed and are having to work on this basis given the amount of work clients will need to undertake in advance of the UCC coming in to effect in May 2016.
We are seeing a significant uptake in interest to gain AEO status now with businesses appreciating the likely stampede as we get closer to the changeover.
The UCC will impact most importers but will have a significant effect on the landed costs and compliance processes of those businesses we have listed above. If you are one of these businesses then we recommend you contact us immediately to arrange a meeting to discuss your position.