HMRC is taking a strict approach to IPR compliance obligations. A UK tribunal decision confirmed the strict compliance obligation for the IPR customs procedure.
IPR (Inward Processing |Relief) is a customs procedure (AKA customs regimes). It suspends the duty and VAT on products that are imported for processing or repair before being re-exported.
IPR is, post-Brexit, increasingly used by SMEs in the UK. It has been promoted as a solution to the new cross-border environment to reduce import duties. It remains however a complex procedure creating a range of legal obligations on the business. Failing to meet these obligations will result in the cancellation of the suspension. As a result duty and VAT will be due.
This UK tribunal decision confirms this and suggests prudence before using this procedure. HMRC strict approach to compliance obligations for IPR confirms the importance of internal customs compliance. It also highlights the risk of such a procedure for traders.
The case in a nutshell: IPR Compliance Obligations and Bill of Discharge
- Thyssenkrupp Materials (TK) imports materials such as aluminium to the UK. TK was approved for IPR which allows suspension of customs duty and import VAT pending discharge. If the goods are exported outside the EU, the duty and VAT liabilities are discharged altogether.
- HMRC considered TK had breached Inward Processing Relief (‘IPR’) conditions. This breach covered the period from March 2014 to December 2014 during which there had been several imports. (HMRC can go back several years when looking for past duty & VAT).
- As result, HMRC issued a C18 Post Clearance Demand Note dated 26 April 2017 in the amount of £8,889,275.43.
- £2,409,009.91 was customs duty and £6,480,265.52 for VAT.
- Thyssenkrupp Materials UK Limited (‘TK’) appeals against the decision by HMRC.
What’s the full story?
In 2014, HMRC raised concerns regarding information on the BODs not matching the information contained in HMRC’s system CHIEF. Information into CHIEF was entered by agents to lodge the customs declarations. TK accepted that the BODs could be improved to provide better clarity to HMRC.
HMRC had considered TK had breached inward processing relief (‘IPR’) conditions. According to HMRC they failed to comply with their bill of discharge (‘BOD’) requirements.
One of the IPR compliance obligations is to submit a “Bill of Discharge” (BOD) to HMRC. The bill of Discharge demonstrates the export of the goods and to cancel the duty and VAT suspended at import. The Bill of Discharge is in addition to the export declaration.
Thyssenkrupp had submitted a Bill of Discharge (BOD), in time to HMRC. The Bill of Discharge was an Excel spreadsheet and contained several line items.
However, for HMRC, TK breached the conditions of its IPR authorisation by failing to lodge an accurate BODs.
Some line items were incorrect and did not match the information declared in the export declaration. There was therefore a mismatch between the information in the customs declaration and the Bill of Discharge (BOD).
More controversial, HMRC also considered that a single error on a single line item of the Bill of Discharge (BOD) excel spreadsheet affects the entire the Bill of Discharge (BOD) that is erroneous.
For HMRC, the error on a single line item of the BOD resulted in a customs debt in respect all the line items in the BOD. This explains the amount in question.
TK contends that any such claim is wrong in law appealed the decision.
The appeal was dismissed
Why? The discussion
The case is looking at transactions that happened in 2014. The legislation in force was therefore the Community Customs Code that applied to these transactions.
TK made several contentions, we’ll highlight just some of them here, just refer to the case for the full details.
Both parties referred to the Court of Justice of the European Union (the ‘CJEU’) decision in Döhler Neuenkirchen GmbH v. Hauptzollamt Oldenburg (Case C-262/10) (‘Döhler’) regarding whether a single error within a BOD invalidates the entire BOD such that all the customs duty and import VAT suspended under the IPR system becomes due
For TK, Döhler is only directly applicable to the facts of the case referred i.e. where there was an absolute failure to supply a BOD. TK further contends that failure to include a row for a discharge of import goods on a schedule BOD (missing rows) is probably a relevant non-fulfilment, because a schedule BOD is simply an aggregated form of BODs for various import goods, but there is no authority for the claim that an incorrect row of any kind is a relevant non-fulfilment.
Did the court agree?
The court did not agree with TK’s contentions and refers to the CJEU in Döhler, at :
“Therefore, it must be held that the non-fulfilment of an obligation, linked to the benefit of an inward processing procedure in the form of a system of suspension, which must be carried out after the discharge of that customs procedure (…) gives rise, in respect of the entire quantity of the goods covered by the bill of discharge, to a customs debt pursuant to Article 204(1)(a) of the Customs Code, where the conditions set out in Article 859(9) of the Implementing Regulation are not met.”
The courts also did not accept TK’s submission that there is no authority for the claim that an incorrect row of any kind is a relevant non-fulfilment. The court…
“accepts HMRC’s submission on the importance of adopting a strict approach and that, since that procedure involves obvious risks to the correct application of the customs legislation, the beneficiaries of that procedure are required to comply strictly with the obligations and the consequences of non- compliance with their obligations must be strictly interpreted.”
What if TK had amended their customs declarations?
TK did not amend the customs declaration in CHIEF. The court accepted TK’s contentions that failure to make a post clearance amendment (PCA) is not a requirement in law, in the authorisation or in the agreed BOD format.
HMRC made the point that TK should have made a post clearance amendment (PCA) to correct the incorrect entry on the CHIEF system, and should have referred to the post clearance amendment in the relevant BOD, so that HMRC data could be reconciled to the BOD. Although the court accepted that post clearance amendment are not a requirement, the court agreed with HMRC that, without these steps having been taken, the CHIEF and BOD data could not be reconciled, and therefore falls to be regarded as inaccurate and/or incomplete. They consider this view to be consistent with the decision in Rolls Royce (at ) which made clear the requirement for BODs to be accurate and complete to the importance of the customs authorities being able to track goods under the IPR regime .
What was the errors and discrepancies discussed?
It is instructive for every trader using IPR to see how the court treated each type of discrepancy and errors. Here is a list of errors that resulted in the BOD to be regarded as inaccurate and/or incomplete:
- Where a commodity code entered on the CHIEF system was incorrect, and the commodity code on the BOD is correct, in the absence of an amendment by TK, CHIEF data and BOD data could not be reconciled,.
- Where TK did make a PCA by which it informed HMRC that the incorrect commodity code had been entered on CHIEF but the PCA did not itself update the HMRC data, in the absence of a reference on the BOD to the PCA, so that reconciliation with the HMRC data was possible.
- Where there is a mismatch between the weight or customs values recorded on CHIEF and the weight shown on the BOD, and the data which appears on the BOD is correct but an error was made when the relevant information was entered on CHIEF, and no PCA was made so that reconciliation with the CHIEF data was possible
- Where an entry on CHIEF was cancelled and a PCA made but the cancellation was not made clear on the BOD so that reconciliation with the CHIEF was possible.
- Where there are mismatches between the commodity codes on CHIEF and in the BOD and the data which appears on the BOD is correct but no PCAs were made so that reconciliation with the CHIEF data was possible.
- Where there is a mismatch between the commodity code on CHIEF and in the BOD and the data which appears on the BOD is correct, and a PCA was made but no reference to it was included with the BOD so that reconciliation with the CHIEF data was possible.
- Where there are mismatches between the EPU number (being a number identifying the relevant port of entry) recorded on CHIEF for particular consignments and the corresponding EPU information on the BOD, and the EPU information on the BOD was incorrect, and in the absence of a PCA the CHIEF and BOD data could not be reconciled.
- Where an incorrect additional import weight was entered onto SAP through to BOD because of inadvertent manual override.
- Where there are discrepancies relating to stock imported in a previous quarter having contributed to the export quantities recorded, and the BOD does not clearly indicate that earlier imports contributed to the relevant disposals.
- Where there is an incorrect statutory reference, labels or export entry dates within the BOD, or the BOD does not make clear which specific entries an extension is claimed against
What did the court decide?
The court found that TK’s BODs were required to contain accurate particulars that reconciled CHIEF and BOD data without the need for further investigation. They concluded that on the basis of the strict approach required as clearly set out in Döhler, that an error in the import or disposal lines of one import entry gives rise, in respect of the entire quantity of the goods covered by the BOD, to a customs debt.
Why this case on IPR Customs Obligations matters?
- IPR is not a duty relief. Under IPR, import duty is not removed, it is suspended. Only when the goods are re-exported, and the legal obligations are duly met that the procedure is discharged, and the duty suspended are removed. HMRC strict approach to compliance obligations for IPR highlights the importance of compliant internal processes.
- HMRC can check an import or export declaration long after the arrival of the goods during a customs audit. They can raise additional duty if duty has been underpaid at the time of import. HRMC have 3 years from the declaration to collect the underpaid duty. Under certain circumstances this can be extended to 5 years and in post-Brexit legislation up to 20 years. Traders often receive a Demand Note for backdated import duty covering several years. This backdated duty and VAT can quickly add-up to considerable amount of money.
- HRMC and business advisers often recommend Inward Processing Relief (IPR) to SMEs as a mechanism to reduce import duties. In particular post-Brexit. Some businesses do not have the internal expertise and resources to understand and meet their legal obligations. A review of the business compliance processes/risks should be carried out before such procedure is used.
- IPR is not always cost effective because of the heavy compliance requirements. Other duty saving mechanisms may be more efficient. Sometimes paying the duty and postponing the VAT is the most efficient customs strategy.
7 basic steps to meet IPR compliance obligations
- Check the Customs Code (GB for England, Scotland, Wales and the UCC for NI). Check the regulations applicable to your transactions and your obligations when using IPR.
- Check your IPR authorisation for the rules specific to your own business authorisation.
- Check you are only using IPR for the commodity codes listed in your authorisation.
- Check customs declarations made in your name and on your behalf by your agent are correct. Traders carry the responsibility for meeting their customs obligations, not the agent.
- Check the customs declarations against the Bill of Discharge.
- If using an ERP system, verify the accuracy of the data extracted from the system. Check individual transactions or for high volume with random checks.
- Get an external audit to have the assurance that you have not missed anything. If you have doubts about your compliance level, get in touch to book a health check of your customs obligations. We have different levels of review, from a light touch distance health check to a full on-site documents’ examination. For details: email@example.com
Source: Thyssenkrupp Materials (UK) Ltd v HMRC  UKFTT 443
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