The Three Pillars of Customs Compliance: Are you importing your goods into the UK correctly?

Uptick in HMRC enforcement activity

Over the past few years, HMRC has significantly increased its focus on customs audits and investigations. For the financial year 2023-2024, HMRC reported securing a record compliance yield of GBP41.8 billion, up from GBP34 billion in the previous year¹. This reflects their ongoing focus on audits and compliance checks, supported by investments in their compliance workforce.

A key focus of HMRC is to cut down the instances of customs non-compliance and ensure any underpaid customs duties and VAT are recovered, particularly in a post-Brexit trading environment, where customs procedures are more complex and prone to error.

As a result, UK businesses involved in international trade to/from the UK must ensure that they are importing and exporting their goods correctly. When goods are imported into the UK, it is important that the Importer of Record, either directly or through their customs representatives:

• make full and accurate customs declarations; and
• pay the right amount of customs duties and VAT.

The Three Pillars of Customs Compliance

There are three key elements that importers will need to identify to ensure they are making accurate customs declarations, and are paying the right amount of customs duty and VAT. These three elements are known as the "Three Pillars of Customs Compliance" and are:

• Classification: Importers must ensure that the goods have the correct commodity classification code so that the right tariffs can be applied to them.
• Origin: Importers must ensure that the goods have the right origin and that any processing the goods have undergone has been taken into account.
• Valuation: Importers must work out the correct value of the goods so that the customs duties and VAT can be calculated for the import, using the classification and origin of the goods.

Failure to comply with the three pillars, or including incorrect information on a customs declaration, is a breach of UK customs law and can result in enforcement action being taken by HMRC against the Importer of Record. This may include:

• Businesses being subject to enforcement actions by HMRC (or another customs authority) which can include monetary penalties.
• HMRC commencing an investigation or customs audit of a business.
• Goods can be subject to stoppages and seizures by HMRC (or another customs authority) pending clarification and investigation.
• The goods being subject to higher rates of duty and VAT on the basis the classification, valuation and/or origin is changed.

Practical steps that importers should take in respect of each pillar are discussed further below.

1. Classification

Importers will need to find the right tariff classification of their goods. This will involve identifying the commodity code for the goods.

Commodity codes are internationally recognised reference numbers that describes a specific item when importing or exporting those goods. This code must be included on the import declaration.

Importers should review the good(s) in question and consider:

• what the goods are made of;
• what the goods are used for;
• how the goods work or function;
• how the goods are presented or packaged; and
• which code in the UK's Integrated Online Tariff best fits the description of the goods (found here).

If you are unable to classify your goods, it is possible to ask HMRC for guidance.

• You can obtain non-legally binding advice on the classification of the goods. This will involve emailing HMRC who will aim to provide response within five working days.
• You can obtain a legally binding ruling on the classification of the goods by obtaining an Advanced Tariff Ruling (ATR). Following the completion of an application to HMRC containing information about the good(s), importers are provided with legally binding ruling on the classification of the goods, which is valid for up to three years. Obtaining an ATR can take approximately 30 to 120 days.

2. Origin

For customs purposes, origin is how customs authorities classify where a particular good comes from or where it is made, ie it determines the "economic nationality" of a good.

There are specific rules of origin which determine whether an importer is able to take advantage of a reduced or zero tariff rate. There are no standard rules of origin across international trade. However, there are broadly two types of rules of origin used:

• "Preferential rules of origin", which apply to countries which have a preferential trade arrangement in place such as a Free Trade Agreement (FTA). These rules of origin are negotiated in a bespoke manner, reflecting the objectives of the parties to the relevant agreement.
• "Non-preferential rules of origin", which apply to trade where there is no preferential trade arrangement or an alternative regime.

Where an FTA is in place with agreed rules of origin, these will be in the form of preferential rules of origin. This means that certain goods, once their origin has been determined, may be given preferential tariff treatment. Any preferential rate of duty will depend on there being preferential coverage for goods of that type either between the UK and a third country – and the product:

• meets the relevant rule of origin;
• is wholly produced in the preference country or substantially manufactured there according to the specific rules of origin; and
• is not subject to a quota which would limit the quantity of the product that can be brought in under the preference.

Where preferential rules of origin exist, such goods will be subject to a reduced or zero tariff rate. Businesses should therefore ensure that they assess their supply chains and review the origin of their goods, and the importing/exporting destination, to benefit from any reduced or zero tariff rates. The schedules to the FTA will set out the preferential rules of origin that need to be met.

If you import goods into a country that has no FTA with the export jurisdiction, the non-preferential origin of the goods is determined by the non-preferential rules in place in the importing jurisdiction. Non-preferential rules are also used to determine origin under trade defences measures such as the imposition of anti-dumping and anti-subsidy (countervailing) duties.

Exporters need to demonstrate to the relevant customs authority that any applicable rules of origin have been met, be they preferential or non-preferential rules. It is necessary to include the country of origin of goods on all customs declaration. This determination, alongside any proof of origin, may be checked by customs officials at the border.

If the origin of your good is difficult to determine, or you need supply-chain certainty, it is sensible to obtain an Advanced Origin Ruling from HMRC. This is a legally binding determination on the origin of a good, which is usually binding for three years and helps provide businesses with certainty when it comes to the origin of the goods they are importing/exporting from the UK.

3. Valuation

The last pillar of customs compliance is valuation. When goods are imported and exported to/from the UK, businesses must declare the value of the goods to HMRC on the customs declaration. This value determines the amount of customs duty and VAT payable on the good(s).

There are six methods for calculating the value of goods for the purposes of duty and VAT, known as Methods 1-6. Each Method has a different application:

• Method 1: Transaction price. This is based on the price paid or payable by the buyer to the seller for the goods when they are sold for export to the UK. This must be the last sale for export to the UK.
• Method 2: Cost of identical goods. This is based on the transaction value of identical goods exported to the UK at or about the same time (within 90 days) as the goods being valued.
• Method 3: Cost of similar goods. This is based on the transaction value of similar goods exported to the UK at or about the same time (within 90 days) as the goods to be valued.
• Method 4: Deductive value. This is based on the selling price of the goods; identical goods; or similar goods in the UK.
• Method 5: Computed method: This is based on the costs of production of the goods. This uses the total of the cost or value of materials, and the costs involved in the manufacturing or other processing used in producing the goods.
• Method 6: Fall-back method. This is the ‘fall-back’ method to use when you are unable to use any of the other methods. This involves working out the customs value by using reasonable means consistent with the World Trade Organization (WTO) customs valuation principles, contained on their website (found here).

When valuing goods, the methods must be tried sequentially, ie a business must apply Method 1 first, then move to Method 2 if Method 1 cannot be applied. If Method 2 cannot be applied, then move to Method 3 (and so on until Method 6 is reached). However, Method 1 is the most common method of calculating value for customs purposes and applies to over 90% of UK imports. Care needs to be taken when valuing goods in the context of intra-corporate transfer pricing agreements.

To ensure that a business pays the right amount of duty and VAT, it is critical that the customs value is completed and declared accurately.

 

How we can help

DLA Piper's Trade and Government Affairs team advises on all areas of customs and excise law and policy, helping clients to comply with UK import and export rules, including the three pillars of customs compliance (classification, origin and valuation). We also help businesses rationalise their supply chain costs and procedures, and prepare for HMRC audits. We are part of a global international trade team, with other hubs in the Netherlands, Brussels, Washington DC and Singapore. The team works closely with the UK VAT and transfer pricing practices.

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¹HMRC's annual report and accounts 2023 to 2024: performance analysis - GOV.UK