Cutting customs duty costs is an often-untapped way to improve gross profit margins and inject cash into a business, but looking deeper into a poorly understood area of business can be daunting and easily overlooked.

Finance teams can start the process by asking how much customs duty they are currently paying. From there they can work through 10 steps to identify opportunities for future savings and retrospective claims.

1.   Reclassification of tariff codes: 

Determining the correct customs classification (or tariff) is often complicated, and errors can lead to significant customs duty overpayments. 

The customs tariff has over 16,000 codes, with rates varying from 0-260%.  Definitions are often complex with unfamiliar language and businesses often unclear on categorisations.  A single word can have a dramatic effect.

Once the correct code is identified, further savings are possible through “tariff engineering”.  This is a common method for making minor changes to a product or how it is shipped so that it becomes classified to a tariff with a lower rate of duty for example, the product could be split down and later assembled in the UK or built up before submission to customs.

2.   Customs origin & Free Trade Agreements (FTA): 

The UK has an FTA with over 70 countries that allow qualifying goods to be imported at a reduced, often free rate of duty. However, businesses must be proactive to take advantage of FTA arrangements, determine whether the conditions apply, and ensure other parties provide the necessary documentation and make the necessary claims.

Several little-known elections can increase the scope of savings and make the claims process more robust.  Once set up, claims for the lower rates should just roll in but it’s advisable to put in checks to make sure nobody has dropped the ball.

3.   Understanding and applying deductions:

The regulations require several items to be added to the cost of goods to arrive at an acceptable customs value (for example, freight costs to the EU and insurance).  The customs rules also allow several elements to be deducted from the customs value, thus lowering the customs duty cost.

For example, goods are often purchased on payment terms (for example, 30, 60 or 90 days), meaning the importer is paying for both the goods and the provision of finance.  If certain conditions are met, a deduction can be made for the finance element.

Our Customs Planning Ideas Database lists 25 potentially deductible elements.

Any additions to the customs value must also meet conditions. We have come across several instances where a company has uplifted its customs value to include costs such as royalties, R&D contribution, commissions etc., where the charging conditions were not met.  Getting rid of these uplifts again lowers costs.

Note that 70% of imports are from related parties. Special rules apply to these transactions, but there are still potential deductions and savings available. These imports also provide several other cost-saving opportunities.

4.   Duty relief:

There are five typical duty relief schemes commonly adopted by businesses, as well as several lesser-known specific reliefs. All these relief schemes have options and elections that can increase their scope, ease the administrative burden and reduce compliance risks.  In our experience, these options are not well understood and are often overlooked.

The typical duty relief schemes are as follows:

Inward Processing Relief on imports that are processed and subsequently exported
Outward Processing Relief on the value of materials exported and subsequently re-imported within a new product
Tariff Inversion Relief Applying the duty rate of UK manufactured goods rather the duty rate of the imported components where the latter is higher
End Use Reduced or nil rates of duty when imports are used to produce certain things (for example, car components used in industrial assembly)
Returned Goods Relief Return of goods to the UK that have not been processed

Regarding the lesser-known specific reliefs, some are general (sample relief, low-value consignments, testing) and some are industry-specific, especially is aerospace, chemicals, food & drink.

5.   Autonomous tariff suspensions:

Customs duties are not purely in place to raise revenue, they also aim to protect domestic industry.  Many businesses are unaware that tariff suspensions can be applied for to remove customs duty on imports of raw materials and components that are not sufficiently available in the UK. Businesses can apply and lobby for new tariff suspensions and, if granted, these will remove tariffs on those imports for two years or longer.

Brexit has generated greater potential in this area as the UK looks to identify what is made in the UK, rather than the whole of Europe.

There are many existing suspensions already in place that businesses are unaware of, and care should be taken to look at all the individual tariff lines around your imported goods.

6.   Customs declarations:

A customs declaration must be completed, submitted and accepted each time goods are imported or exported from the UK.  Agents typically charge businesses £35-£65 per customs entry, depending on complexity and buying power. However, there are now several software options making it quick and easy to bring the customs declaration function completely or partially in-house.

This can reduce declaration charges by up to 90% or provide greater visibility and analytical information back for the same price as you are currently paying.

The number of customs declarations businesses will be making has increase significantly since Brexit as movements to and from the EU are also caught.

7.   Customs management automation

Customs management has two key aspects.  The first is the process of providing the information to make the customs declarations.  The second aspect is audit-based control. For many businesses completion of these processes can take a huge amount of time for several employees. However, there are now new efficient ways that these processes can be streamlined, most significantly by embracing the software developments which can automate parts of the system, for example, CAT360.

It is often underestimated how long the customs declarations process can take.  It often involves determining the core customs elements (classification, origin, valuation adjustments etc.), getting the information and necessary documentation to a third-party service provider to make the declaration and obtaining copies of those entries for your records.

Well thought-through processes can streamline this process and costs, but more significant savings can be made through software solutions (see #6).

When it comes to audit control, failure to meet your obligations can result in penalties, additional duty demands, investigations, clearance delays etc.  As such, most businesses spend considerable resources carrying out checks of their customs declarations against instructions.  Again, streamlined procedures can generate savings here.  But, there have been significant software developments in this area that should help semi-automate customs control.  For example, our Customs Software (CAT360) pulls in customs data electronically from HMRC, carries out several checks to look for errors and creates exceptional reports.

We have seen businesses employ 2-3 people to carry out checks that could be completed more accurately using software in less than an hour, saving over £40,000 per annum.

8.   Deferral of customs:

While deferring customs duty and import VAT doesn’t generate a cost saving, it is a simple way to ease cash-flow pressures.  Solutions such as customs warehousing and duty deferment accounts can delay the point at which duty is collected by at least 45 days. Absolute cost savings can also be made here by reducing the guarantee costs that underpin these deferment solutions.

For example, Postponed Import VAT Accounting (PIVA) allows the business to account for import VAT through the VAT return.  This saves the business from having to pay the VAT and then recover it.

Absolute cost savings can also be made here by reducing the guarantee costs that underpin these deferment solutions. Businesses can apply for guarantee waivers or reductions in other instances.  Authorised Economic Operators (AEO) can reduce the level of guarantee of import duty by 70%.

9.   Working the supply chain:

The potential benefits of strategic customs planning can often be grown exponentially by working with your suppliers and customers.  For example, if your domestic customer sells to export markets, you could work together to extend the benefits of IP Relief by transferring goods to them duty-free.  Neither party would qualify for this relief in isolation but working together, you strip cost out of the supply chain.

You could be the party exporting in the above example.  Another example, you may manufacture items that would attract 0% duty if you imported them into the UK.  However, domestic suppliers may be importing materials or components into the UK that attract duty and include these costs in sales to you.  Working together, you could strip out these costs using the inverted tariff relief (see #4).

10.   Reclaims:

Many of the planning ideas above can be applied retrospectively (up to three years). This can inject significant cash back into the business.  Any reclaim requires proof of the case, with the necessary supporting data files and completion of the appropriate forms.  Specific agreement on the above methods is a critical step in agreeing any reclaim with the customs authorities.

Since Brexit, the amount of customs duty under management has more than doubled, so the risks and opportunities are greater.

If you would like advice on reviewing systems and procedures and support in identifying the unique cost saving opportunities that may apply to your business, we would be happy to have a no-obligation conversation to discuss.

We are often able to deliver solutions with guaranteed return on investment.

Talk To Us