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Have retailers fallen into post-Brexit compliance traps?

Ian Worth, Director, VAT and Customs Duty services
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In the eighteen months since the UK left the EU at the end of 2020, the retail world has experienced a number of challenges, not helped by lockdown-enforced closures of bricks and mortar outlets, or supply chain difficulties arising from displaced containers around the globe. The Brexit effects have almost been a side issue, but as COVID restrictions are eased and supply chains start to show signs of recovery, the attention of retailers is turning to the post-Brexit customs landscape.

Retailers in the UK have had to deal with new logistical challenges in getting stock onto their shelves, as well as in some cases making deliveries to customers in the EU. Supplies from the EU have required customs declarations and payment of duties, although a set of confusing easements in the UK have created a number of traps for the unwary.

Let me start by repeating the UK government’s pre-Brexit forecast that leaving the EU would result in an increase in customs declarations from around 50 million a year to around 250 million a year. Other estimates vary, but generally were in the range of a multiple of five to seven. The first Brexit easement eliminated the requirement for a customs declaration to be made on entry to the UK, allowing importers to record the relevant details in their own records, then submit their declaration and payment up to six months later. In mid-2021, this easement was extended for a further six months, ostensibly to allow more time for importers to prepare, but missing the obvious point that those importers delaying their declarations during the second half of 2021 were obligated to submit their declarations for the first half of 2021. In reality, this meant that HMRC recorded only around 80 million customs declarations during 2021, a significant shortfall against an expectation of over 250 million.

Trap #1

Many importers failed to submit their supplementary declarations within the required six months, and few have been pursued by HMRC. In many instances, importers had their declarations delayed by their agents, sometimes without their knowledge, so were unaware of their customs obligations. No flags were raised by businesses who experienced very little change to the way they had previously dealt with their supplies from the EU, some are still oblivious to the liability they have.

The easement intended to avoid port bottlenecks has effectively trapped many of its users into non-compliance, unwittingly in many cases.

Retailers can obtain their declared import data directly from HMRC’s MSS (Management Support System) reports, in a spreadsheet format. This is exactly the same data that HMRC uses to select its audit targets, with close attention to where the data indicates potential errors. Careful monitoring of this data can keep a business informed of any anomalies with a chance to correct errors quickly, before they become the subject of an intrusive customs audit. Crowe’s customs team has developed an analytics tool to deliver insights from large data reports, a useful aid to customs compliance and efficiency. A reconciliation of this data against a retailer’s purchase records can quickly identify any undeclared shipments, before HMRC starts enquiries.

While many retailers rely on their customs agents to provide customs documentation, the MSS reports mentioned above include all the data declared, by every agent, on a retailer’s behalf – even agents who are not authorised, or who incorrectly allocate somebody else’s import against a retailer’s EORI number.

HMRC is starting to increase its audit activity, with a particular focus on the accuracy of import declarations made since 1 January 2021. In particular, they are targeting declarations for import shipments from the EU, where preference was claimed. The EU/UK trade agreement, signed just days before the end of the Brexit transition period at the end of 2020, was widely publicised as delivering a Brexit bonus of 'tariff free, quota free' trade. The small print, largely ignored by many importers, showed that preference was subject to strict (and very complex) rules of origin, which in broad terms meant that preference could be claimed only where there was evidence that the goods were manufactured in the EU. HMRC’s audits are uncovering several instances where preference was claimed on goods which were not eligible, resulting in unexpected demands for underpaid duty.

Trap #2

Another easement allowed UK retailers to claim preference without having the required evidence of origin, on the basis of “importer’s knowledge”. In this way, goods were imported free of customs duty, declared as being of EU origin. HMRC audits are discovering that “importer’s knowledge” was rarely operated correctly, and was even abused in some instances. The small print required the importer claiming importer’s knowledge to obtain satisfactory evidence of origin by the end of 2021. Following that, it has been a requirement that evidence of origin must be held by the importer at the time of shipment if relying on 'importer’s knowledge'. Some customs brokers have adopted a default practice of declaring “importer’s knowledge” simply as a means to clear shipments without payment of customs duties, thus streamlining their process.

There is a learning point here, which might be too late for some. If the supplier has not provided a statement on origin, the main reason is likely to be that the goods don’t meet the rules of origin, so attempting to circumvent the requirement for evidence by claiming 'importer’s knowledge' is not going to end well.

Trap #3

Many retailers have fallen into the trap of relying on clearance agents to make compliant declarations, as if they were somehow responsible for an importer’s obligations, and had the experience and knowledge of the importer’s products and activities. Clearance agents are service providers, who can only make declarations using information provided by the importer they are representing. If the information is incorrect or vague, or if there is no detailed instruction to the agent, there is a high likelihood that the resulting customs entry could be incorrect, with too much, or too little duty paid.       

The customer experience

The customer experience, particularly for online retailers, has continued to be a high priority, but Brexit has presented challenges and costs in maintaining the seamless nature of online supplies to customers in the EU. The customer expectation of goods arriving without complications has become a difficult experience to manage.

In clothing retail, it is common for an online order to include three or more sizes of the same garment, supported by a customer-friendly returns policy and infrastructure. In a single market where goods could move freely between members of a Customs Union, the only challenge for the retailer was logistical. Now UK retailers have a customs border to contend with, on top of the logistical challenges. In order to maintain the customer experience, the retailer has to complete UK export declarations, EU import declarations, pay customs charges and import VAT in the EU. Then, the retailer also needs an infrastructure to manage returns.

All of these additional elements add cost to the retailer, yet the demanding customer expects the retailer to simply absorb these costs, forcing many retailers to review their strategies for supplies to EU customers.

The need for customs declarations to be made for shipments between the UK and the EU has highlighted a lack of communication between the key players in the supply chain. In some cases, it has also highlighted a lack of knowledge about customs obligations, and for many retailers, a need to understand how insightful data analysis can support customs compliance, monitor and manage broker and carrier performance, and identify risks and opportunities.

For further information about how Crowe’s Customs team can help retailers to navigate their post-Brexit customs obligations, please get in touch with [email protected] or your usual Crowe contact.

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Robert Marchant
Robert Marchant
Partner, National Head of Tax