Effective Financial Leadership Part 3: Understanding the Scale of Customs Compliance Risk

This article considers the risks associated with customs compliance from a finance perspective. Essentially, customs is a core part of tax governance and falls within the legal remit of the Senior Accounting Officer (SAO).

Although it clearly belongs in the remit of the finance team, it’s an area that is often overlooked. But at what price?

With the number of audit-based customs penalties up 34% last year, it’s time for finance executives to understand the true extent of the risk and prepare for the inevitable.

The potential cost of non-compliance

During an audit, customs data and systems are analysed for accuracy. If compliance has not been effectively managed there are a series of financial implications:

Collection of underpaid customs: customs declarations are open for three years, so any inaccuracy highlighted in current activity is likely to have historical implications.
Penalty Payments: In addition to the repayment of underpaid duty, penalties may be applied and this can be up to the value of the underpayment.
Loss of relief on future payments: many businesses benefit from lucrative customs relief procedures or simplifications. Once a business has been penalised for customs inaccuracies, HMRC can remove the right to claim relief in the future – increasing costs and eroding future profit margins.
Future delays in customs clearance: following a HMRC penalty, businesses are regularly subject to on-the-spot checks at the point of import which can cause frequent delays in customs clearance, necessitating higher stock holding requirements and impacting working capital.

Barbourne Brook has developed a software solution that carries out analytics using the same data used by HMRC to spot these issues and empower businesses to proactively spot and correct any errors, thus mitigating the penalty risk, loss of future customs relief and future customs delays.

How do HMRC select companies for audit?

HMRC primarily uses intelligence-based risk assessment to select businesses for audit.

It uses historical knowledge of contentious issues and big data collected through all customs declarations submitted.

A company’s trade data can be assessed against its own historic data and against its peers to spot anomalies and changes in customs elements.

If a company performs poorly at audit, that is errors are found, they are given an increased risk score, making them more likely to be selected again for further audits.

HMRC also builds in a random element to customs audit selection to keep all businesses on their toes.

The HMRC audit process

HMRC audits focus on two key areas:

The processes, controls, and management of the customs function
The core customs elements that determine the correct customs duty due

Where a business has greater control of the customs process, there are generally lower error rates on declarations. Where good processes are evident, HMRC tends to proceed with a less intensive sampling of transactions when assessing the core elements.

When looking at processes, HMRC expects to see good control of the master data, completion of customs declarations (or selection and instruction of customs brokers if outsourced), record keeping, checks and corrective action.

The core customs elements HMRC focuses on are:

Tariff classification of imports
The origin of imports and use of Free Trade Agreements
The customs value, and whether it includes all necessary elements
The use and management of any customs reliefs of special procedures
Issuing incorrect customs origin statements to overseas customers, leaving them exposed to customs demands and penalties when they import

A small error in one of these elements can snowball into significant customs duty exposures.

First Steps to Future Proof Customs Compliance

Finance teams can take proactive control of customs compliance by subscribing to the data HMRC use when carrying out their audits (known as MSS data) and carrying an internal review of their operations against the issues set out above.

Barbourne Brook can provide mock HMRC audits to quickly identify any areas of risk, implement fixes and mitigate any duty demands or penalties. Contact Adam Wood for more information.

Contact Us

If you would like to discuss any aspect of your customs compliance, please contact Adam Wood on 01905 914031 for a no obligation conversation.

About Barbourne Brook

Barbourne Brook are a proactive team of customs duty planning experts with a wealth of knowledge and insight in the customs sphere, offering scalable solutions backed by industry-leading technology.