Picture a UK SME that is undergoing a customs audit. After reviewing the business, HMRC raises two concerns. First, that the firm has been purchasing goods from a related party overseas, so officials suspect that the price was kept artificially low, and duty was therefore under-declared. Second, that some products were misclassified into categories with 0% duty when, in HMRC’s view, they should have been subject to a positive rate.

“Responding to that took analysis of three years’ worth of import records, comprising around 19,000 lines of data,” says Ian Worth, Director, VAT, Customs and International Trade at Crowe UK, who helped the business through the case. “Eventually, we were able to go back to HMRC and say, ‘In fact, the related-party goods were priced at fair, arm’s-length transaction value, and we can demonstrate that. Plus, the supposed classification anomalies are down to the goods being novel products that we can show were correctly classified’.”

In the end, no further action was taken against the company, but there was a serious concern that the SME could face a multimillion-pound bill for unpaid duty, which would have finished the business.

Providing clarity on imports

The company’s narrow squeak highlights how critical it is for UK SMEs that routinely source goods and materials from overseas to have a grasp on the fundamentals of customs. But it is an area where they often trip up.

“Errors stem largely from a lack of expertise within the business,” Worth says. “Next comes SMEs relying excessively on their forwarder, carrier or broker, whose primary job is to move goods from A to B, not to finalise admin. But a lot of them end up getting roped into making customs declarations, and that tends to go wrong.”

Understand your data points

To make a customs declaration, Worth explains, a carrier or broker requires a set of key data points from the importing SME. The rigour of the process breaks down if the business doesn’t know what sort of data it must provide, or how to present it. As a result, many SMEs lean on their carrier or broker to fill in the gaps, because they don’t understand how to give proper instructions. But providing that clarity enables businesses to protect themselves.

Directions to a broker would typically concern key aspects of the nature of the shipment, says Worth, such as:

• the origin of the goods;
• their commodity code; and
• any particular use they will be put to once they’ve arrived.

“If the goods are eligible for duty relief, then the SME must communicate the relevant details to the broker. As the broker often goes blind into the declaration submission, responsibility for accuracy falls to the SME.”

Worth stresses that, from a risk-management perspective, it is well within SMEs’ interests to ensure they meet their side of the bargain. Left to its own devices, all a broker will have to go on is the covering paperwork dispatched by the supplier overseas. But no foreign supplier is under any obligation to vouch for the accuracy of the data that will be declared in the UK.

“We regularly see customs audits picking up on issues like this,” Worth says. “The exporter may provide a goods description on the invoice and may list a commodity code. But no one on the UK end has any visibility on the expertise of the people selecting that code. So, it could be accurate, but it’s more likely to be a finger in the air. And without any means to check at this end, it’s dangerous to leave the broker relying on the exporter’s details.”

Exports: the roles are reversed

If the UK SME becomes an exporter, Worth points out, the obligations are essentially reversed. “Yes, we have to make an export declaration from this end,” he says. “But only very rarely are there financial penalties or sanctions if that data is incorrect. The information will feed into someone else’s import declaration in the destination country, but that party needs to undertake their own work to determine what the correct data should be.”

However, SMEs have an obligation to provide accurate details on the description of the goods, their quantity and origin, if the goods are going to a country where the UK has a trade agreement.

Worth explains that goods must go through UK-based processing or manufacturing to acquire the ‘UK origin’ stamp. Citing the example of US tariffs on Chinese goods, Worth notes that, amid the large quantities of those goods that pass through the UK en route to the US, some may be relabelled to say that they originate from the UK. “In some cases, that would be a deliberate ploy to avoid US tariffs,” he says. “In others, it would be done quite naively, through a lack of knowledge around Rules of Origin requirements.”

In Worth’s assessment, the key points that SMEs must be able to cover are how to:

• classify their goods;
• apply Rules of Origin procedures;
• ensure that they declare the correct origin, and
• determine that the method of customs valuation is correct and legally compliant.

Around those points, SMEs must also understand Incoterms when goods are traded internationally.

“Businesses don’t know what they don’t know,” Worth says. “So, first of all, I would ask any SME: do you know how much customs duty you’re paying every year? Then, following that, is it an amount that concerns the business? And is it a sum that the business has enough visibility over to guarantee its accuracy?”

A business paying £10,000 of duty per year is not necessarily a high-risk element for HMRC, Worth explains. “However, if it should be paying £1m a year, that’s a different story. If in doubt, there are consultants who can review your entire customs footprint, highlight areas of risk and help you implement practices to protect your business.”