Carol Lynch, Partner in BDO and expert in customs administration takes us through the critical areas companies should be considering, and pitfalls to be avoided when it comes to completing customs declarations.
Since 1 January 2021 there has been a complete change in how companies trade with the UK.
Companies need to review this from both a compliance, supply chain and strategic point of view. Effective planning can leave you in a strong competitive position, enable ongoing access to the UK market, ensure you have implemented potential cost reductions against competitors who have not planned effectively and ensure you do not face a post-clearance liability in the next three years.
Critical in this is:
- determining how to complete Customs Declarations;
- applying a cost-benefit and risk analysis to whether to bring this in-house or outsource; and
- ensuring, either way, that you have complete control over the accuracy of those declarations when lodged with Revenue.
Some of the most critical areas in this regard are listed below:
- Completion of Customs Declarations
With effect from 1 January 2021, Import and Export Declarations are required on goods entering Ireland from the GB and on goods departing Ireland for GB (similarly the same will happen on the GB side, albeit with a potential simplification for the first six months of the year).
These customs declarations are tax declarations and, as with all tax declarations, need to be 100 percent accurate.
In terms of Import and Export Declarations the company is the Importer or Exporter of Record and liable for the accuracy of the declarations completed. Therefore, you will need to ensure that whoever is completing these declarations on your behalf, either internally in your company or on an outsourced basis, is experienced and knowledgeable about Customs Clearance rules.
Along with the tax compliance requirements, accurate completion of customs declarations will also lead to speed of customs clearance. As a corollary, inaccurate completion of declarations will lead to delays, error routings, and customs interventions; thus, delaying the clearance of your goods.
Inaccurate completion of declarations can also lead to an underpayment or overpayment of Customs Duties (if applicable).
In this regard we recommend that you engage your clearance agents using the same rules as you would apply to your tax advisors or auditors.
In addition, once declarations are completed, we recommend an internal audit take place to review all these declarations completed on your behalf. A statement can be obtained weekly and monthly from ROS to enable this to take place. Customs will carry out a post-clearance audit within the next three years and they will look for evidence of your internal controls.
- Tariff Classification
Accurate assignment of tariff classifications on the customs declaration is one of the most critical aspects of Import and Export Compliance. The correct tariff classification will determine the duty payable (where there is a positive duty rate applicable). However, it also determines the rules applicable to qualify for a Free Trade Agreement zero percent duty rate (see Rules of Origin commentary below). Lastly, it also determines the security criteria applicable to the goods, license requirements, sanctions impositions, etc. There are serious penalties for the inaccurate or negligent assignment of tariff classifications and therefore this tends to be a high priority area for all companies importing and exporting. If you have not worked through your customs tariff classifications, then this is one of the most important steps you now need to take.
- Customs Valuation
All goods imported and exported need to be assigned a value for customs purposes. The value for customs purposes relates to the inherent value of the goods on crossing the EU border. Therefore, even if the goods are supplied free of charge, an accurate customs value needs to be assigned.
This can be relatively straightforward in the case of third-party sales where there is a sale between unrelated parties. However, it becomes a lot more complex to determine the value where the sale is between related parties, or where there is no sale on import or export, e.g. with consignment stock.
- Proof of Origin
Along with the above, you will also need to ensure you have evidence of the origin of your goods to ensure you can take advantage of this agreement. In order to qualify you will need to ensure:
- You understand the rule of origin applicable to your product. This is produced in an Annex to the Trade and Cooperation Agreement and will be based on the tariff code of your finished product.
- You undertake more than simple assembly operations, packing or unpacking, testing, etc.
- You have evidence of the origin status of any raw materials or parts that you purchase from EU or UK suppliers. This is often an area where companies find, in an origin audit, that they do not have the necessary evidence in place.
- You can manage dual sourced items and allocate correct origin.
- You can manage percentage rules, e.g. if the rule of origin for your product requires no more than 40 percent non-EU material costs, then what happens if your BOM is always hovering on the 39-41 percent margins?
These latter two require strong ERP and IT controls along with, again, internal audit and risk management.
The above are just some of the new rules that companies will need to apply.
As mentioned, there are two points of audit:
1) On entry of the customs declaration
2) As part of the post-clearance audit
Most of the customs audits in Ireland take place on a post-clearance basis; therefore, putting in place compliance procedures and internal audit checks are critical to ensure there is no un-expected build-up of liability.
Impact on Customs Clearance Requirements
Many companies are now looking at whether to employ a clearance agent or to bring this in house. We recommend that all Financial Controllers put in place strong controls and checks when considering this. In deciding, we recommend applying the following cost-benefit and risk approach:
- Cost of staff: Customs will be operating 24/7 from 1 January 2021 and your staff will need to also operate on this basis in interacting with Customs. What will the cost of this be when compared with the cost of out-sourcing to an agent?
- Experience: It is difficult to get experienced staff and equally difficult to get experienced customs clearance agents. However, the quality and accuracy of declarations will have both a short- and long-term impact on your business. Therefore, you need to ensure staff/agents are experienced and, at minimum, have undertaken appropriate training.
- Scalability: In engaging a clearance agent you need to ensure that the company is capable of scaling to meet your needs. How many agents do they have? What software is being used? How many declarations can they input for how many customers?
- Compliance: You want to ensure that robust Standard Operating Procedures (SOPs) are in place and strong internal audit controls and checks. You do not want to be in a position where a post-clearance audit unveils hidden errors, and the company has left itself open to post-clearance duty collections, penalties and fines. We see this many times in the application of customs classification and in qualifying for “origin” benefits.
- Document retention and filing: All customs documentation must be retained for a minimum of three years, plus the year of filing. In addition, these documents may be required for VAT compliance for seven years. It is important to ask how your documents are being filed, where will they be retained, and what is the ease of access when the post-clearance audit takes place. We find this can be one of the most time-consuming issues when preparing a customs audit, i.e. where documents are unavailable, archived or simply impossible to access after a year.
- Control: What control will you have over your declarations? What visibility will you have into the customs processing system? Most companies would like to retain control while having expert support and intervention with Customs on Customs-specific issues. How will this work?
Customs agents are, as we know, in short supply. However, BDO and Fexco have addressed this issue by establishing Declaron – www.declaron.ie. Declaron is a new company focusing on providing customs clearance agents to meet your Brexit requirements. It has unequalled software for simplifying the submission of declarations. It is supported by experienced Customs Clearance Agents who interact with Customs on your behalf. It is also supported by the Customs and Tax expertise of BDO, together with the Fintech capabilities of Fexco. Declaron meets all the requirements in the checklist above and is established to support financial directors and controllers in ensuring that this area of compliance is fully managed.
By Carol Lynch, BDO