Brexit: Understanding customs duty

In the second of a series of articles, Tom Kivlehan, Head of Indirect Tax at BDO, looks at the emergence of customs duty as a board issue and how planning ahead can give FDs a competitive advantage.

If a week is a long time in politics, two years of Brexit negotiations will feel like several lifetimes.

The UK/EU discussions will be dissected in detail and rumours will abound. Such a changing environment makes it difficult to plan. In addition to the fast-moving technological and regulatory changes impacting global markets, UK businesses now need to factor in the wave of changes that will be wrought by Brexit.

Business leaders should take the advice of former US President, John F. Kennedy, who said: “Change is the law of life. Those who look only to the past or present are certain to miss the future”. Brexit may seem like a distant event, but companies that have a good grasp of their own structures, with flexibility built into their business model, will be well placed to meet changes head on.

So what does the future hold? We’ve heard a lot of talk from the Government about its ambition for frictionless trade. One area which seems destined to thwart that ambition is the reinstatement of Customs Duty. Unless the UK remains in the Single Market it is difficult to envisage a future where some form of customs tariffs are not imposed.

So what should businesses be doing to get ahead of the game?

Key process review

The first thing for UK companies to think about is conducting their own key process review. It is very common for today’s businesses to have a de-centralised customs function that is not aligned to other core business processes.

The review should evaluate your current processes and procedures against tax authority requirements, identify any gaps and make recommendations for efficiency in the supply chain operation.

In reviewing their processes, businesses should also scenario plan and look at the potential impact of hard and soft variants of Brexit on their supply chain and duty requirements.

Seek out guidance on the three key areas of classification, valuation and preference compliance to try to ensure that the optimum amount of duty is being paid and to minimise the risk of tax assessments and/or penalties.

Understanding classification, valuation and preference compliance

These three areas are complex but are fundamental to understanding your liabilities, so it is worth looking at them in more detail.

Firstly, tariff classification drives a number of import variables, such as: the duty rate; entitlement to preferential rates of duty; import restrictions (such as quotas and suspensions).

Secondly, the valuation (or customs value) declared on imports forms the basis for calculating the amount of duty payable, so it is essential that these are set in accordance with valuation rules.

And finally, preference – a variety of preferential trade agreements exist between the EU and its key trading partners (and hopefully between the UK and other countries inside and outside the EU post-Brexit). The ability to claim preference on import and/or export of a product is governed by legislation that requires key criteria to be met and supporting documentation (such as a certificate of origin) to be obtained.

Making sure your customs duty liabilities are managed effectively

So you’ve reviewed your current processes, you understand your current classification, valuation and preference requirements and you’ve done some scenario-planning for various potential Brexit outcomes. Now it’s time to make sure your customs duty liabilities are managed as effectively as possible.

A variety of reliefs and regimes exist to encourage manufacturing within the EU (and hopefully within the UK too post-Brexit), which either suspend or extinguish customs duty liabilities.

Find out which duty reliefs and/or regimes may be appropriate to your business in order to reduce costs and improve margins. As the negotiations progress they will also be a clearer indication of which of these may remain and can be taken advantage of.

Final thoughts

If, as a financial director, you don’t have a good understanding of your customs duty processes and the way that Brexit may impact them, now is the time to grasp that nettle.

When Brexit takes effect (perhaps as soon as April 2019), customs duty is likely to become payable when goods move between the UK and EU member states and full import/export declarations may be required.

Businesses that have had the foresight to look ahead now and take the time to plan ahead will win a competitive advantage when the UK finally leaves the EU.

Tom Kivlehan is Head of Indirect Tax at BDO.

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