Introduction
According to a survey conducted after Brexit by the Chartered Institute of Procurement and Supply, 60% of UK manufacturers have experienced delays in receiving goods from the EU, while 30% have experienced delays in exporting to the EU.
Brexit had a huge impact on British and EU companies that had only ever traded within the single market as they had very little experience of things like commodity codes, incoterms and rules of origin.
Commodity Codes
It’s essential to get the commodity code right for anything you’re importing or exporting. Either way it’s in your interest to get it right because if you miss-classify a product you’re exporting and it can’t clear customs to be delivered to your customer it will cost you money while it’s sorted out and your customer may be reluctant to buy from you again.
Conversely, a company had several containers of goods they were importing from China seized by HMRC because they didn’t agree with the commodity code and thought it was an attempt to evade duty. It took months of negotiations to get the goods restored and they had to pay additional duty and a fine or face everything being destroyed which would have effectively bankrupted them.
The best way to prevent this from happening is apply for an Advanced Tariff Ruling which is a legally binding decision from HMRC. You need to take care with the application however because if they give you a ruling with a higher import duty than you expected you’re stuck with it.
Incoterms
The importance of incoterms is often overlooked because unless your company is big enough to have a dedicated import/export role, it takes effort to properly understand the differences between them and which one is best for you. Most of the time it’s not an issue, the transport company and customs agents will smooth things out between them but if something goes wrong you may find you’re liable for costs relating to unloading or insurance that you hadn’t budgeted for.
Freight Forwarders
Whilst many transport companies worked hard to prepare their customers for the changes caused by Brexit, others put their heads in the sand and refused to believe it would actually happen including some of the biggest and best known logistics companies. Some of the Fast Parcel Operators on the other hand spotted a brilliant opportunity to make some additional cash by exploiting people’s ignorance and their desperation to get their stuff delivered. They submitted incredibly complicated invoices to their customers with lots of different lines relating to different duties and were overcharging by hundreds of pounds in duty that wasn’t payable.
Rules of Origin
Compliance with rules of origin is still one of the greatest challenges for manufacturers as, first of all, they need to understand exactly which rule of origin applies to the products they export and they also need to be able to prove that their products comply with that rule which requires a very thorough understanding of the supply chain and where raw materials are sourced from. Lots of companies buy their components from distributors in the UK but that doesn’t mean the goods are of UK origin. It’s your responsibility to go up the supply chain to find out where they were actually manufactured. Then, if for example, the rule of origin that applies to the end product is the percentage rule, you need to be able to calculate if the % of non-originating raw materials is under the threshold for you to claim that your products are of UK origin. Only if you’re certain can you tell your customers that they don’t need to pay import duty.
Export Licenses
Quite a lot of manufacturers have fallen foul of the post-Brexit requirement to obtain export licenses for goods that are deemed to be dual-use. This includes some pretty innocuous items that, unless you understand this area of international trade well, you’d never think could be restricted in case they were put to use in a military context.
Solutions
Customs Special Procedures offer the possibility of suspending or drawing back customs duties so if you structure your supply chain intelligently they can make a big difference to your cashflow and even your bottom line.
Customs or Bonded Warehousing
Customs Warehouses are privately or publicly owned with a designated area controlled by customs authorities that is used solely for imported goods. These goods are exempt from duties, taxes, and other customs charges until they leave the warehouse or designated area. This also provides the economic operator with time to negotiate their sale, either on the internal market or abroad, or to arrange for the goods to be processed, manufactured, transferred to another customs procedure or otherwise disposed of in an authorized manner. This Special Procedure is beneficial to any companies that use distribution centres, especially for stock that may remain on the shelf for longer periods of time so it’s really more relevant to companies that import a finished product for resale like trainers for example and they hold the stock without having to pay any duty or VAT until they move the trainers for sale to a shop at which point the duty and VAT is payable and the trainers are in free circulation. So this is about deferring import costs and managing cash flow rather than avoiding them completely.
Inward Processing (IP)
Inward Processing provides relief from import duties and taxes for goods that will then be re-exported after having undergone manufacturing, processing, or repair. This Special Procedure can result in significant savings for companies that source materials from all over the world to make products for export as it potentially eliminates customs duty for the imported materials as long as the finished product is exported. If it’s sold in the UK then the duty and VAT becomes payable. You need excellent accounting systems in place to get duty relief for inward processing as you have to be able to prove the correct rate of yield and you have to be able to prove the finished product was exported so think carefully about your incoterms. But it can save you a lot of money depending on what you import to make your product and what the import duty is not to mention the 20% VAT.
Outward Processing (OP)
Outward Processing provides duty relief on goods that are temporarily exported for processing or repair, then re-imported as processed products. Using this Special Procedure, companies do not have to pay duty and or VAT on the original value of the raw materials; they must only be paid on the value added abroad plus on logistics costs.
Temporary Admission
Temporary Admission allows goods to be brought into a country temporarily, typically for less than 24 months. The goods have total or partial relief from import duty – it’s determined by the commodity code. This Special Procedure is often used for events like trade shows, art exhibits, or music festivals and the goods must be imported for a specific purpose. They must not have undergone any change except normal depreciation due to the use made of them. It can also be used to export samples or prototypes for testing without paying import duty and VAT when they return.
End-use
End Use Relief reduces or eliminates customs duty on certain imported goods. These goods must meet a defined criteria and are put to a specific use within a set period of time. It only applies to certain tariff codes such as goods in the aerospace, shipbuilding, and defence industries.
Temporary Storage
Temporary Storage allows companies to store goods at an authorized storage facility. They can be controlled by customs for up to 90 days without having to pay duty or tax. It is designed primarily for goods that are going to be re-exported but is also used by companies to obtain import documentation if they want to release them into free circulation or decide what they want to do with the goods. An example of this would be that you import stock from the USA and you won’t know until after the goods arrive if you’re going to sell them in the UK or the EU. Temporary Storage gives you the flexibility to do that because like all the Special Procedures, it’s designed to facilitate trade.
Authorisations
Using a special procedure is something that needs to be authorised by HMRC and there are 3 types depending on what you’re doing.
Full authorisations are required for regular use and should be completed at least one month before importing.
For businesses importing goods not more than 3 times in a calendar year you can effectively assume you’ve been granted authorisation by using the correct customs procedure code on your import declaration. The corresponding customs procedure code is used at re-export and you’ll need the usual evidence such as the bill of lading to prove the goods left the UK to avoid HMRC demanding import duty and VAT.
It is possible to apply for retrospective authorisation up to a year after the import or receipt of the goods, but these requests must be exceptional and you’ll need gold-plated documentation for it to be granted.
Freeports
Freeports have been in the news a lot recently as the one located on the Thames Estuary has just been given the final sign off which takes the number of live freeports to 6 and the announcement of 2 in Wales.
They’re all centred round one or more air, rail or sea port but can extend up to 45 km beyond the port. They need at least one customs site to be considered operational and Authorised businesses can import certain goods to a Freeport customs site with simplified customs documentation and without paying tariffs.
Each Freeport will also have up to 3 tax sites where companies can benefit from a range of tax incentives such as enhanced capital allowances, relief from Stamp Duty Land Tax and employer National Insurance contributions for new employees. Eligible new businesses moving into a Freeport tax site, and some existing businesses that expand, will also benefit from full business rates relief. So if you are looking to expand or to restructure your supply chain in a more efficient way freeports are definitely worth considering, especially as an alternative to setting up a warehouse or manufacturing facility in the EU for example.
3PLs
Another alternative is using a 3rd party logistics provider, or 3PL, to hold stock in other customs territories. It’s more commonly used by ecommerce B2C businesses who need to have their product in free circulation in the EU for example so their customers aren’t charged import duty and VAT on delivery. They can send large quantities of stock to the EU or USA with one delivery cost and set of customs paperwork and then the 3PL manages the stock and delivers to the end user. It’s a great way to test the water in a new market without committing to the costs and red tape of setting up an entity, I’m working with a British manufacturer of pottery wheels at the moment who sells B2C and wants to expand to the US. Using a 3PL will drastically reduce the need to deal with the different requirements of each state whilst allowing them to sell nationwide.