HMRC audits fail importers

The UK’s spending watchdog has found that British import businesses are worried HM Revenue and Customs’ attempt to ease some of the administrative burden on shipping and receiving goods could potentially put them at financial risk.

In its report The Control and Facilitation of Imports, the National Audit Office (NAO) found that by reducing the number of audits and inspections it does, HMRC may not only be miscalculating tax revenue, but also putting importers at risk because they could be liable to pay back taxes at a future date for filing incorrect reports.

While HMRC’s strategy to limit the number of checks carried out at the border has brought benefits, it has also brought some uncertainty about whether they are paying the right amount of tax and duty, and the risk of sizeable back duty demands if they make a mistake.

Error count
Indeed, the watchdog found that while the frequency of importer audits is decreasing, error is actually increasing. In particular, new importers appear to have difficulty in complying, with this group experiencing error rates of nearly 50%. Furthermore, according to the NAO, while HMRC checks traders’ documents for more than 280,000 imports each year, nearly one in five of these checks are not carried out correctly.

It is an area of real concern. The NAO found these businesses welcome audits because they provide some assurance they are correctly complying with their obligations. But feedback suggests they view this as an area where HMRC does not perform strongly. One of the main criticisms raised is importers find it frustrating to take assurance from a successful audit only for errors to be discovered in subsequent audits and back duty demands issued.

Such faults are partly a result of how the responsibility for managing customs activity is divided among various directorates and that international trade is a minor function for most of them. The NAO found that accountability and reporting lines are blurred and that there is limited control of the end-to-end process.

Importers also find the burden of audit increases when customs staff lack an understanding of the industry sector and the skills and knowledge appropriate to carry out an efficient and effective audit. Increased bureaucracy and changing regulations are also causing headaches for traders, as well as costing them money. Big Four auditor KPMG estimates that the administrative burden for UK business of complying with customs regulations is about £800m.

As part of their normal business, traders carry out their own checks, and may discover under or over payments. But under EU legislation, traders have to correct errors on an entry-by-entry basis, so they have to submit separate schedules for under and over payments rather than a single schedule. HMRC has initiated discussions with the European Commission to allow a single schedule. There are differences in the processes for correcting under-and over-payments, hence importers regard applying for repayments as one of the more onerous areas.

Descriptions of goods can also be a source of frustration. Currently, for each import, traders have to complete a declaration including classifying the goods by commodity code. Every commodity has a unique ten digit code based on its description and composition which determines the duty rate and any restrictions; at present there are some 16,000 commodity codes.

But classifying goods can be difficult because one item may potentially come under more than one code. For example, a trader applied to HMRC for a commodity code for an Easter snow globe made of glass with a polyresin base, containing a depiction of bunnies and spring and playing music. HMRC considered that it could fall under four categories (including the definition of a “glass” item and a “festive item”) and the issue was sent to the EU for clarification. This all takes time.

Speeding up processes
The EU and HMRC have tried to speed up the process. As permitted under EU legislation, HMRC runs the Customs Freight Simplified Procedures which allow businesses to complete a simplified declaration at time of import and submit a supplementary declaration by the fourth working day of the following month. Traders are authorised to use the procedures subject to meeting specified criteria and having a good compliance record. The procedures minimise the formalities at the border, allowing customs to focus resources on high-risk traders, while facilitating compliant businesses. In 2007-08, 84% of imports by volume and 30% by value were imported under these procedures. The EU average by volume is 70%. In total, 29,000 traders use the procedures.

Customs also operate a number of EU duty relief and suspension regimes which allow these businesses to take advantage of reduced rates of duty or defer payment of duty. There are 12 main regimes in operation, but the NAO found that because of their complexity, it can be difficult for traders to identify the appropriate regime. They also complain it is difficult to find complete information about how to comply with the requirements of the regimes.

In January 2008, the EU introduced a new initiative called Authorised Economic Operator (AEO). Traders can obtain AEO status after the completion of a full audit to show their systems and processes meet certain security standards. This will entitle them to speedier clearance at the border.

But there are concerns that the audits are resource intensive for the trader and that the benefits in obtaining AEO status minimal.

They have also raised concerns that HMRC does not have adequate resources to carry out audits to the level required by the EU, which means they could potentially face financial penalties for non-compliance. As of April 2008, fewer than 100 import businesses had applied against HMRC’s predictions of 2,000 during 2008-09.