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Why you should not automatically accept HMRC’s conclusions and calculations

Ian Worth, Director, VAT and Customs Duty services
16/06/2021
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For regular importers, UK Customs audits are often an unwelcome intrusion into their business records, taking up valuable time and sometimes resulting in demands for underpaid duty.

In fact, most Customs audits result in duty demands which can go back over a three-year period, so the sum demanded is usually significant. This is of course appropriate – if the demand is correct and the payment is actually due. However, some organisations receive a demand from Customs and simply accept and pay the requested amount. This can lead to overpayments.

Background

HMRC use Management Support Systems (MSS) data to select their audit target companies. MSS reports contain all the data declared at import, by or on behalf of a company, using its VAT registration number. This gives HMRC a complete picture of every declaration made, and is a useful tool for spotting anomalies in an importing pattern which may require further investigation.

Prior to an audit, HMRC usually contact a trader and ask for further documentation to be made available in relation to a number of specific Customs entries. These are not random selections – they have already been identified as being unusual by comparison with other entries, where a different commodity code or customs procedure code has been used, for example.

A Customs audit is much more than just an official health check of customs compliance; it is the starting point of what could become a very intrusive investigation, often based on initial assumptions gained from a spreadsheet report. Worse still, these initial assumptions are often not fully investigated, but are followed through with a demand for underpaid duty, with little or no legal basis.

Why should a challenge be considered?

Around 30% of duty demands which are challenged are either overturned or reduced. However, only 3% of demands are actually challenged. Some might conclude that this means 97% of Customs demands could be correct, but somehow this seems unlikely (there are of course instances where demands are correct, and should be paid).

A very recent example shows that HMRC issued a demand for underpaid duty because royalty payments made by the importer had not been included in the declared import value. The organisation paid a six-figure sum without question, but analysis of the facts afterwards quickly showed that the demand had been miscalculated, and the sum due should have been much smaller – a four-figure sum.

While these figures may seem alarming, there is an element of trust by traders in HMRC decisions, alongside a lack of confidence in disputing a demand, for which a working knowledge of Customs procedures is a significant advantage.

Planning points

It is recommended that businesses who have received a duty demand (C18) from HMRC seek specialist advice. Using the MSS reports to prepare for an audit, or to check declarations and correct any errors before they have even been questioned by HMRC, could result in some significant cost savings.

UK businesses are able to purchase MSS reports from HMRC, which gives them access to exactly the same information as a Customs auditor. With an understanding of how to interpret the data in these reports, they can be a valuable tool in support of customs compliance procedures. Businesses can receive MSS reports each month, which enables swift detection of errors and corrective measures can be taken long before HMRC select the business for audit.

There is a process for challenging demands and decisions, but strict time restrictions apply; it is important to appraise the demand quickly and implement the next steps needed to launch a successful challenge.

To discuss this further, please contact Ian Worth or your usual Crowe contact.

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Ian Worth
Ian Worth
Director, VAT and Customs Duty services
London