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7 Ways to Reduce Your Customs Duty Costs!

2013/6/11      view:

    Why are you importing goods when this involves taking on additional risks?

    You are most likely driven by a desire to reduce costs and so improve both you margins and competitiveness. However, you may be leaving money on the table if you do not look at the options open to you to reduce your customs duty costs.

Outlined below are seven classic ways to reduce your customs duty costs which are accepted by HMRC.  Many of these ideas can be applied retrospectively going back up to three years giving you an opportunity to recover lost profits.


Reclassification of Your Product

Your customs duty rate is determined by the tariff classification and origin of your imports. Duty rates vary from 0-217% with an average rate of 4% for imports in to the European Union. Reclassifying your products to commodity codes attracting a lower or nil duty rates can generate enormous savings for your business.

There are three legitimate opportunities available to you;

Correcting the Code

Each product you import should only be classifiable to one specific commodity code in the customs tariff. However, the tariff includes over 16,000 codes and so finding the correct one sometimes presents you with a very difficult challenge.

The line between one classification and another is sometime very fine. For example:

  • Wet noodles (in water) attract a lower duty rate than dried noodles;
  • Dolls of mythical creatures attract a lower duty rate than dolls representing humans.

Furthermore, a slight product modification in your product specification (known as tariff engineering) can push your goods in to another classification and improve your margins.

Stripping Down Kits

Assuming that your imports are correctly classified to the code attracting the lowest rate, you may have a further opportunity to reduce your costs by stripping down import in to kits to achieve a more favourable net duty rate.

For example, a stereo turntable attracts duty at 2% but the stylus, which is a high value item, could be imported free of duty. Presenting the stylus separately and fixing it to the turntable after import would reduce any import costs.

Building up Kits

You may be able to gain an advantage by presenting various components at the same time in an unassembled kit form if the finished kit attracts a lower rate of duty than the individual components.

For example, parts used to make digging machines are subject to duty whereas the finished digger could be imported free of duty. Presenting an unassembled kit of parts could, under the customs classification rules, result in the kit being classified as finished machine and realise material duty savings.

Using Trade Agreements

The EU has entered into Trade Agreements with hundreds of overseas countries which may allow your imports to attract a reduced or nil rate of duty.

Occasionally, more than one agreement will apply to your goods and you need to make sure you are getting the most favourable rate.

Be aware that various conditions must be met before you can benefit from Trade Agreements, the key one being that your goods must ‘originate' in the partner country. Working out whether your product meets the origin rule is often complex and leads to error.

You may have put you off using this type of planning in the past because the authorities frequently challenge the use of Trade Agreements and seek to recover your duty savings going back three years. However, there are now specific steps you can take to protect any benefits you obtain.

Even if you think you are benefiting under Trade Agreements, we advise you to get someone to check your imports on a regular basis. If the supporting documentation is not available when your goods are imported, then your agents may not know of the potential claim and pay the duty on your imports at the full rate.

Deducting qualifying items from the customs value

The previous planning ideas focussed on reducing the rate of duty applied to your imports. This rate has to be applied to a customs value to determine your customs duty costs.

You are required to add certain elements to the price paid for the goods to reach an acceptable customs value, such as freight and insurance costs, certain royalty payments etc.  Conversely, you have the option to deduct certain elements, such as buying commissions, finance charges etc, to reduce your duty costs.  Deducting elements will require you taking positive steps to exercise any options and ensuring you gather evidence to show all the appropriate conditions are met.

It is worth reviewing your supplier agreements to ensure you are taking full advantage of these options and, if you are not, implementing changes going forward to reduce customs costs without necessarily affecting the amounts you pay.

Until recently, it was not possible to apply these valuation deductions retrospectively. However, a European Court of Justice Decision has now opened up the way for you to make duty reclaims in certain circumstances.

Prior Sale

Prior sales planning is another option to reduce your customs value in cases where you are buying from intermediaries rather than a manufacturer.  If there are a chain of sales before import, you may be able to elect an earlier sale in the chain as the basis for customs duty and strip out any subsequent mark-ups from a charge for duty.

For example, you place an order for 1000 teddy bears with Sales Co for £100,000. Sales Co then buys the goods from Manufacturing Co for £50,000 and arranges for shipment direct to you. By default you would pay duty on £100,000 but by using prior sales planning you could declare the £50,000 and halve your duty bill.

Applying this planning will not affect the amounts you pay for the goods. However, certain conditions apply, including having access to the earlier sales price, proving the earlier sale took place with intention to export the goods the the European Union and tracing transactions through the supply chain.

Inward Processing Relief (IPR)

Having focussed on the duty rate and the value to which that rate applies you can now turn your attention to customs reliefs.

IPR allows you to claim duty relief on raw materials, components and goods imported for processing which are subsequently sold outside to the European Union. Processing in this context could include you inspecting and repacking the goods through to complex manufacturing.

You will need to obtain authorisation to benefit from IPR and, in some circumstances, you may be able to get retrospective approval going back one year or to the date of a previously lapsed authorisation.

You will also be taking on certain additional obligations, although if you invest properly in setting up the procedure these requirements can be streamlined.  There are a number of instances of the customs authorities seeking to claw back relief where the importer or his agents have failed to comply with administrative conditions.  We recommend you pay particular attention to business and regulatory changes in this area.

If you are already operating IPR than there are various ways to increase the benefits you enjoy through small changed to rates of yield, scrap provisions, qualifying disposals etc.

Duty Relief on Re-imported Goods

Once you export your goods outside the EU they lose their EU status and will be subject to duty on re-importation.

Outward Processing Relief (OPR) allows you to claim total or partial relief on goods you send outside of the European Union for process or repair. Like IPR (above) you will need to obtain an authorisation to benefit from OPR.

Returned Goods Relief (RGR) will enable you to import goods previously exported where they are re-imported in the same state within three years. This can apply to goods rejected and returned by your overseas customers.

Cash Flow Planning

Now reduced your costs as far as possible is there anything else you can do to gain a competitive advantage? What about cash-flow planning?

By default, your imports are subject to customs duty and import VAT at time of arrival in to the European Union.

If you are a regular importer then you probably pay your duty and import VAT using a deferment account, which gives you a cash-flow advantage of up to six weeks.

Implementing customs warehousing can give you further cash-flow advantages by deferring the customs and import VAT point until call off from the warehouse (which could be a physical building or virtual system) and delaying payment of your customs duty and import VAT until the 15th day of the month following call off.

Your business is constantly under pressure to reduce costs. Customs planning may provide you with a great low risk opportunity to realise cost savings.

The planning ideas outlined above are just a sample of the opportunities available to you to reduce your customs duty costs, sometimes with retrospective effect. We have developed a database of over 170 such ideas based on experience of hundreds of our clients over the last 15 years and would welcome the chance to discuss these with you. Please note, failure to meet your customs obligations can result in additional duty demands and penalties going back three years. We take great care in implementing customs planning to all but eliminate these risks. Our approach includes gaining specific approval from the authorities wherever possible, working with you to implement robust procedures and providing ongoing support.