Customs classification – the practice of identifying and using the correct commodity code for your product – is a key requirement for any cross-border trader.
Commodity codes are used in the completion of customs declarations and to identify what measures, duties and quotas may apply to any internationally traded good.
It is therefore striking that, at a recent Chartered Institute webinar, classification experts TariffTel reported its findings that around two in every five businesses are using the incorrect codes.
This means there are potentially thousands of businesses that aren’t paying the correct levies on their goods. These goods movements are also at a higher risk of being delayed if they have incorrect paperwork, and these businesses could even be liable to being fined by HMRC.
‘Compliance issue’
Speaking to the Chartered Institute Daily Update following the webinar, TariffTel’s customs systems manager Elizabeth Davies said that this is a significant “compliance issue”.
“You’ve got the compliance issue initially and then there’s duties because you could be over- or under-paying; this could either affect your profit margins or, at a more serious level, your goods could get stuck at the border and leave you with unexpected storage costs, as well as the need for extra time and resource to correct inaccurate documentation” she says.
“It happens a lot with food, for instance. If you’ve not got the correct export health certificate (EHC) for the code you should be using, then your goods could get stuck. If your food is perishable, that trade is at risk of getting lost.”
Reputational impact
While businesses may get away with it initially, Davies points out that HMRC can conduct customs audits at any point, giving it access to a business’ documentation relating to its goods movements for a period of the previous three years.
“HMRC will go back three years to claim back any unpaid duties, so you could be facing a double financial liability – on the one hand there’s the duties you’ve not paid and then there’s the possibility of fines.
“There’s also the work you’ll then need to do to fix your processes or to find additional resource to do the classification correctly.”
She adds that failing an audit can also have a reputational impact on a business, including with its supply chain partners. “The consequences of getting tariff codes wrong can have far – reaching affects across your entire business. This is why we suggest that having the right process and technology systems in place should be a priority for those trading internationally today.” Davies continues.
Devil’s in the detail
When it comes to doing classification correctly, Davies points out that businesses need to be paying detailed attention to the data they are using.
“Businesses don’t have the detailed information when they need it or don’t know what questions they need to be asking to get the data in the first place,” she says.
“It’s more than just looking up a code in the tariff book, assigning the correct code involves understanding the various rules and exceptions behind each code, and importantly understanding the product you’re trying to classify. By this I mean, the materials in your product, its intended use, manufacturing processes, etc. This is the level of detail we need to be going into every time to ensure a correct code at the end. Technology can help automate this, it needn’t be a huge burden for businesses.”
And in regards to TariffTel’s findings that two in five aren’t using the right codes, Davies explains:
“We’ve done around 500 code audits for businesses and found that, from this dataset, and the large amount of data analysis we’ve done for our clients in general, it’s around two in five codes that aren’t correct.”
She adds that in some data analyses the proportion of incorrect codes has actually been even larger.
“If government puts some additional resource into ensuring the correct duties are coming in, that could result in a lot more tax revenue. Equally, if businesses are seriously overpaying, they won’t be reaping the profits they should be, which also has an economic impact.
“Fundamentally, it’s about having a consistent approach.”
Further information
If you need further support or education to understand what classification is and how to do it, check out the Chartered Institute's ‘how to classify your goods’ training course.
For more details on TariffTel's solutions on tariff code accuracy, duty rate assurance and cost savings when classifying products, you can visit here.