The future of UK's trading relations with its former EU partner states, and the rest of the world, is uncertain. Talk of Brexit 'redlines', regulatory alignment, no-deal, World Trade Organization (WTO) rules and confusion continues. In this session we strip back the debate to identify the challenges business will face, and provide practical guidance on how to navigate the post Brexit customs landscape.
David Lowe: Hi I am David Lowe, one of the Partners behind Thinkhouse. This this podcast is about Customs and Trade Compliance, and I am joined by our new Director of Customs and Trade, Ursula Johnston. Hi Ursula.
Ursula Johnston: Hi, good afternoon David.
David: So Ursula, customs is in the headlines, on the 10 o'clock news, it is a dusty world that rarely sees the outside world and now it is all out there. I am conscious that within a lot of discussions on Brexit, there is a lot of talk about no deal, WTO rules and customs. Tell us a little about what a no deal Brexit could mean for customs.
Ursula: Thank you David. Under a no deal Brexit we would put a formal customs border between the UK and the EU and we would start to trade on what is referred to as WTO rules (World Trade Organisation rules) and that effectively means that the UK and the EU would start to trade as if they were third parties, so the same way that the UK conducts a trade with China or the US for example.
So what this means from a costs perspective is that duties would be levied on goods crossing the border in either direction and you will also have to pay import VAT rather than acquisition VAT. Businesses will need to file a customs declaration for exports from the EU and then an import declaration into the UK and vice versa. What this means is that businesses that have never really traded outside of the European Union are suddenly exposed to a customs compliance risk after Brexit.
David: For those of us who are not familiar with the realities of crossing a hard border and having to fill in the customs declaration, how hard is that?
Ursula: A customs declaration, gives the border officials and the tax authorities all the information that they need to make sure they are collecting the appropriate amount of revenue on those goods. The customs declaration requires 54 fields of data to be completed, key fields include who is the importer or exporter of record, that is the owner of the goods at the moment they cross the border. It requires you to enter a ten digit classification code so that authorities can identify what those goods are, what is the nature of the materials that they are made out of and what are they going to be used for. You also need to assign a value to your goods and there are six methods of calculating an acceptable customs value, the most frequently used being the transaction value which is based on the invoice price, but even where you have an invoice price there may be additions or subtractions to make from that value, if for example you pay licence fees or royalties in connection with the goods. You also need to put where the goods have come from, where they have originated. On the basis of where they originated are you claiming a lower or preferential rate of duty on the basis that you can demonstrate that they qualify for that lower rate under one of the free trade agreements that the EU has signed with other trading nations, or that the UK may sign in the future. You also need to indicate whether you are entering those goods into a special customs regime and that is where you will enter a customs procedure code that indicates to the authorities what you intend to do with those goods post import. You also need to indicate whether your goods require a licence and write details around that licence, what is the licence number and what is that licence covering.
David: So you need quite a lot of data and effort to fill in one of those forms. Can you get somebody else to do it for you?
Ursula: Well most businesses chose to appoint a freight agent or a customs broker to complete the information on their behalf; however what is really important to note is that they are your direct representative, they act in your name and on your behalf. So ultimately if there is error in the data entered, or if you fail to meet one of the requirements around customs evaluation or tax classification, you as the importer or exporter of record are liable for that error and not your customs agent.
David: Right, so your customs agent puts the wrong goods classification on the form and that means you end up paying less duty than you should have, if this comes to light two years later, you as the exporter are going to be liable to pay the penalties that arise.
Ursula: Yes, you will be liable for the penalties, the amount of duty owed, interest on that duty and possibly import VAT as well.
David: OK. So if you get the form filled in badly you might be liable for more duty and penalties. So who enforces all of this?
Ursula: In the UK HM Revenue and Customs (HMRC) is responsible for collecting revenue and then that goes into a central European fund. HMRC will conduct audits either post-import or they will do a spot check at the border, particularly for those companies that are deemed high risk. HMRC has a sophisticated system that uses data around the importer, the type of goods, where they are coming from to identify what they refer to as high risk traders. One option for businesses to try to minimise their chance or minimise the risk of audit activity at the border is to become what is referred to as an authorised economic operator. This is a sort of trusted trader status that means that you can demonstrate to HMRC that you run a safe and secure supply chain which has minimal risk of interference and importantly that you are compliant with customs regulations and that you have appropriate processes and controls to minimise the risk of non-compliance.
David: So anticipating Brexit it would be probably a good idea for somebody who is expecting to be selling across the UK and EU border to consider becoming an AEO, how long does that take to do?
Ursula: This very much depends on the size and complexity of the business and what kind of supply chain that you operate, if you are sourcing goods from multiple locations or just one or two. In my experience I think a business could expect to take eight to nine months to prepare their AEO application.
David: So if we have Brexit in March, you have not got enough time.
Ursula: Some people would already be too late yes.
David: So in terms of what a business can do to prepare for Brexit we just talked about possibly looking at Authorised Economic Operator, what else can businesses do?
Ursula: Businesses can start to look at their supply chains, identify which ones have a significant exposure to Brexit. Do you have sensitive goods that require refrigeration, do you have supply chains that require just in time delivery, do you have supply chains that run through some of the ports that are more exposed potentially to Brexit such as Dover? Businesses are focusing on those supply chains and establishing if there alternative sourcing options. Can I move from an EU supplier to a UK supplier of those materials? They are also looking at if they can mitigate potential additional duty costs going forward by adopting trade facilitation measures such as bonded warehousing, which allows you to store goods under suspension of customs duties until the moment that you release them into the market and if you actually end up exporting those then you do not have that duty cost at all.
David: Right, so if you are a UK based manufacturer buying goods from the EU to make something and then selling that to the EU there might be customs trade facilitation steps you can use to help mitigate the amount of duty.
Ursula: Yes, and in that example David I would be looking at whether you would, in the event of a hard border with the EU, could operate as being known as inward processing.
David: So if you are an in-house lawyer and therefore not in the heart of the logistics team and typically customs will not have been an issue that will cross your desk before, what should you be doing?
Ursula: So that is a very good question David. I think the first step is to really understand your current exposure to customs and trade non-compliance risks where do you already trade with third parties, what does that look like for the business? Is that high volume or high value? Do you already have a team of people that specifically manage those processes? Then I think you have to think about to what extent that risk exposure could increase post Brexit and how the business will manage that and exponential increase. It is also important to start thinking about the Incoterms that you use in contracts with suppliers and customers and to understand who is going to carry the liability for import/export costs. That is perhaps the cost of filing a declaration and then if there is a tariff to be paid on those goods who is going to shoulder that cost, and can it possibly be split. I think businesses also need to think about what there escalation policy is around Brexit for the in-house lawyer. If HMRC audits or raises a penalty is there an appropriate process in place to make sure that it is managed in the right way?
David: Oh right to ensure that it has gone onto the radar of the senior management to take it seriously rather than just an irritating bit of admin.
Ursula: Absolutely, you may need to think for example if you want to make a voluntary disclosure about a past client's risk ahead of HMRC physically landing into your premises and starting to rifle through the paperwork.
David: Great, thank you very much.
Ursula Thanks David.
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