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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.

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