UK Global Tariff: customs duty and cash flow

This article looks at practical Brexit planning considerations for businesses likely to be affected by customs duties and their potential impact on cash flow

17 June 2020

Introduction

The UK Global Tariff (UKGT), published last month, is a welcome certainty; helping businesses to get on with Brexit planning. This article looks at some practical considerations for businesses likely to be affected by customs duties and their potential impact on cash flow.

The fourth round of Brexit negotiations with the EU came and went at the beginning of June, with ministers admitting that there had been little progress[1]. Talks will intensify in July. Given the deadlocked state of the Brexit negotiations, it is increasingly likely that UK importers will be paying customs duties on goods coming from the EU after the Brexit transition period ends.

On 12 June, the UK Government announced a phased introduction to border controls for EU goods coming into Great Britain to give businesses affected by COVID-19 more time to prepare[2]. These measures will be temporary, currently scheduled to last between January and July 2021. Measures include allowing payment of tariffs and customs declarations to be deferred for up to 6 months on many goods and a delayed introduction of notifications and health documentation for products of animal origin. 

The UKGT will replace the EU’s Common External Tariff (CET) for trade with the UK from January 2021, including for trade between the UK and the EU in the event that no EU/UK trade deal is reached by then. The customs duty rates listed in the UKGT differ to the EU’s CET for some goods, which means many businesses will need to recalculate the customs duty impact on their supply chains, replacing the EU’s CET with the rates in the UKGT.

A key lesson learnt from the COVID-19 situation is the importance of cash flow. Where customs duty may be due from January 2021 on incoming goods, it would be sensible for businesses to explore ways to manage the size of any customs duty bill and identify any deferment options to optimise cash flow.

So what does the UKGT mean for businesses in practical terms?

The UKGT will apply to all goods imported into the UK from January 2021, with a few exceptions (e.g. goods originating from a country where there is a trade agreement with the UK, see our previous article[3] on rules of origin).

In general, customs duty is paid per shipment before the goods are released by Customs. Without any special arrangements in place, importers will need to pay customs duty each time a shipment crosses the border. This could be a sizable cost (and an administrative burden) to a business, so consideration should be given to how it may impact cash flow. For example, grape juice attracts 40 percent customs duty rate under the UKGT, most apparel attracts 12 percent. 

For many goods coming from outside the EU, the UKGT will reduce the customs duty as some of the rates listed in the UKGT are lower than the EU’s CET. For example, crushed or ground mixtures of different types of spices attract zero percent customs duty rate under the UKGT rather than 12.5 percent under the EU’s CET. However, in the event the UK trades with the EU on World Trade Organisation (WTO) terms (i.e. without a trade deal), this means customs duty will be payable on goods coming from the EU, with potential implications on pricing for businesses.

Who bears the cost of any duty depends on the contractual terms agreed between the buyer and seller, and specifically the Incoterms applied. For example, where Delivered Duty Paid (DDP) is used, the seller is responsible for both export and import formalities. On the other hand, if Ex Works (ExW) is used, it is the buyer who is responsible for the export and import formalities. It is advisable for businesses to review the latest set of Incoterms (2020 edition) and review the contracts in place with customers/suppliers to ensure that the appropriate Incoterms for cross-border shipments are being used. It is also advisable to review existing payment terms and consider whether terms could and should be revised to improve cash flow.

If there are customs duties to be paid, it is possible to defer the payment through the use of a deferment account. Depending on the size of the customs duty bill, a deferment account may significantly ease cash flow by deferring the payment to the 15th of the following month after import. A deferment account has to be applied for and, once granted, customs brokers completing customs declarations can be authorised to use this deferment account for a business’s imports.

In addition to cash flow considerations, ensuring compliance will be important going forward.  For businesses that have so far traded solely with the EU, customs duties will be a new addition to taxes payable. For large, qualifying organisations with an obligation to identify a Senior Accounting Officer[4] (SAO) sign off, new processes and controls may need to be put in place to ensure compliance. The SAO should be made aware of this, as they can be penalised personally for failing to meet their duties.

Are there ways to mitigate the customs duty?

Yes, there are a few ways to mitigate the customs duty, depending on business operations. Once a business has arrived at an estimate of the potential customs duties payable, it should consider whether applying for and implementing special customs procedures would bring material benefit to the business, by deferring or suspending the payment of customs duties. A cost-benefit analysis should be carried out to determine whether the financial benefits outweigh the cost of operating a customs special procedure.

A further step is to examine the factors that influence how much customs duty is due, with the aim of reducing the impact on cash flow. These factors include commodity codes, customs value and the origin of goods. For example, there may be more than one potentially suitable commodity code and where the resulting customs duty rate difference is significant, it may be beneficial to apply for a binding ruling on which commodity code the business should use. It may also be possible to reduce the customs value by deducting certain elements (e.g. buying commission).

Businesses need to bear in mind that it is the responsibility of the importer, not the customs broker, to make sure these elements (e.g. commodity code, customs value, origin) are accurately declared on the import declaration so that the correct amount of customs duty is paid.

In the meantime, further advice will be published by the UK Government later in 2020 and developments should be monitored closely.

What to do during the remainder of 2020?

Here are a few activities that will put businesses in a better position to respond to an adverse Brexit outcome:

  • Follow Brexit developments and adjust your Brexit response accordingly
  • Enhance visibility on the likely additional cost of importing from the EU by reviewing the commodity codes, valuation and origin of the goods
  • Review Incoterms in existing contracts as well as payment terms where possible
  • Set up appropriate processes and controls to manage the calculation and payment of customs duties due

This article was written by Sian Edmunds, Partner, Head of Food and Drink, and Jessica Yang, Director, JY XBorder Consulting. For further guidance and help with the actions listed above, please get in touch with Sian or Jessica.

[1] https://www.parliament.uk/business/news/2020/june/ministers-questioned-on-fourth-round-of-brexit-negotiations-/

[2] https://www.gov.uk/government/news/government-accelerates-border-planning-for-the-end-of-the-transition-period

[3] https://www.burges-salmon.com/news-and-insight/legal-updates/food-and-drink/understanding-rules-of-origin-for-the-food-and-drink-industry-in-the-context-of-trade-agreements/

[4] https://www.gov.uk/hmrc-internal-manuals/senior-accounting-officers-guidance/saog10100

Key contact

Sian Edmunds

Sian Edmunds Partner

  • Head of Food and Drink
  • Food and Farming
  • Estates and Land
  • Product Liability

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