Brexit Planning for Customs

The Revenue Commissioners estimate that Brexit will cause the number of Irish businesses that must deal with customs requirements to  increase from approximately 17,000 to over 100,000. Most such businesses will be dealing with customs for the first time. The number of annual declarations is  predicted to increase from approximately 1.7 million to  over 20 million.

Customs is based on a substantial body of tax law set out in or derived from European Union legislation. It involves substantial compliance requirements and record-keeping. A breach is subject to interest and penalties for underpaid tax as well as serious criminal liability for deliberate or reckless breaches.

Customs law requires declarations to be made for every movement of goods both to the Irish and UK revenue on each and every occasion. Very substantial information is required on each item. In particular, each must be classified in accordance with the relevant tariff categorisation. special valuation rules must be applied, and its origin must be worked out and confirmed.

If there is “no deal” or if goods do not originate in the place of export (EU or the  UK ) customs duties (as well as value added tax in some cases) will apply at the point of import. Origin requires manufacture or processing in place of export. 

The duty must be either paid  immediately or accounted for. Payment must be made immediately. It may be made from the TAN account with Revenue created, by the EORI registration. A guarantee backed by cash or by a bank or insurance company facility is required for deferral. 

UK revenue (HMRC) and Irish Revenue act as agent for other government departments and agencies in checking goods for conformity with regulatory standards generally as well as broad compliance obligations such as in relation to intellectual property and health and safety. Most interventions by customs authorities are undertaken for these latter reasons rather than for tax or duty reasons 

Particularly onerous requirements apply in respect of plants, animals and high-risk food.  In addition to ordinary customs compliance,  additional animal health and  food safety requirements apply. They require separate additional returns to be made through a separate control system in advance. A very high percentage of consignments (in some cases all) must be checked for documents and or / must be checked physically for conformity.

The duties are very high in the food and agricultural sectors where duty applies. Duties will apply unless they goods or produce originates in the place of export. Qualification for origin cannot be assumed. It must be certified. 

New business processes will be required to ensure that the correct information is assembled and is available in the relevant IT and other  systems. Procedures will be  required to ensure that what actually moves conforms to what is declared. Traders must be able to deal with interventions at the border by way of random or targeted revenue checks.

In some sectors, businesses will need to adapt to customs compliance requirements in order to mitigate customs duty, even in the event of an EU/UK  deal. It may be necessary to undertake particular customs procedures and processes in order to avoid a double charge to duty arising by reason of the fact that the original goods are neither of EU nor UK origin.

Brexit will severely impact some  businesses to the point that they will be no longer viable. In other cases, businesses may shrink with a consequent reduction in employment, short time working and/ or  reductions in wages. Although over time there may be new opportunities where GB suppliers have lost access to the Irish and EU markets, it may take a considerable length of time before the new economic equilibrium emerges.

Businesses should consider how Brexit will impact on the terms of their contracts and prices. In addition to the tariff and nontariff costs of Brexit, the impact of formalities including periodic checks at the border may affect the feasibility of compliance with current performance obligations to customers.

Brexit has the potential to disrupt many supply chains. Distribution through GB may no attract tariffs. The impact may not be immediately apparent, until the whole supply chain is examined. It may be necessary to change supplier or distributor to deal with the effect of Brexit. It may be necessary to organise the flow and movement of goods in a different manner.

Businesses should review their supply chain upwards to the ultimate suppliers of components and inputs in their  business and downwards to their customers and the ultimate consumers and users of their products and services. Any element in the supply chain that involves trade between Great Britain and Ireland or uses the Great Britain land bridge, is subject to potentially significant  change and disruption. 

The Northern Ireland Protocol appears to have secured tariff and customs procedures free movement across the land border in Ireland as well as regulatory alignment for  goods. However, there are  risks to the full implementation of the protocol. The Protocol also introduces some level of disruption and controls on trade from Great Britain to Northern Ireland and to a lesser extent, from Northern Ireland to Great Britain.

All products and materials should be examined in order to determine the correct tariff classification. There are over 17,000 classifications. Misclassification is a notorious risk, and in some cases, specialised advice may be required. Reliable industry sources should be checked and cross-checked where possible to verify the correct tariff classification.

The tariff rate applicable to the goods should be considered if there is a no-deal exit the EU third-country rate will apply to imports from the United Kingdom. It should be assumed that the same rate  would apply to imports into the United Kingdom. The United Kingdom  published a temporary tariff in which it reduced duties in many cases significantly, prior to the 2019 Brexit risk dates. This has been withdrawn but something like it may be reinstated in the event of a no deal Brexit becoming likely.

Businesses should work out the country of origin for all products and materials. Origin does not mean where the goods are transported from, put  where they are substantially made or manufactured. The definitions can be very complex and may be set out in the relevant trade agreement for particular sectors.

The zero rates of duty under a likely EU UK trade agreement will not be available unless the goods are of  EU origin, or likely EU or UK origin (assuming cumulation rules). Many goods used in Europe are in fact manufactured in Asia and thereby  originate outside of the European Union. Goods coming from GB will not qualify as UK origin unless they are sourced, manufactured or sufficiently processed there. EU content is permitted, but there must still be sufficient UK processing. Equally  Irish exports must be of EU origin to qualify.

Certification of origin is now a critical issue. Traditionally proof of origin required applications for documents, which must be held by the time the declaration was made. This is still a prominent feature, but modern agreements allow extensive certification by manufacturers which will assist in many cases. The EU UK Trade Agreement has simplified the position, but there are conditions.

In addition to customs duties, customs compliance costs are likely to be significant. It is often said that the cost of doing EU and UK declarations per consignment i.e. one by the seller and one by the buyer, is often of the order of €100 in total. This may decrease in many  cases over time, where efficiencies are possible. In some sectors, this will eliminate the profit on the particular consignment.

In addition to the bare costs of making declarations, there will be additional costs for businesses in organising the relevant data and ensuring conformity with the declaration.    

Particular additional regulatory compliance obligations apply in some sectors which require extra licences and certificates. The issue was particularly acute in the area of agriculture and high-risk food, where the procedures are very intrusive and costly.

Regardless of whether returns are made in-house or through the freight forwarder or customs agents, there will be additional costs for all parties concerned in dealing with and processing the information. Carriers will have additional costs over and above the customs declarations. Safety and security declarations must be made by them which consolidate much of the underlying customs information.

In addition to these basic compliance costs, significant costs may be incurred where there are random risk-based checks at the border. The trader will bear this risk and cost. The trader may also effectively bear the risk and cost of delays caused by interventions and checks of other goods, which are included in the same container load.

Although it is impossible to predict the course of future currency movements a more difficult Brexit than that anticipated by the markets, is likely to lead to a further fall in the value of sterling. The immediate aftermath of the Brexit referendum saw a very substantial fall in sterling relative to the euro. Further sudden falls are a distinct possibility given the potential for economic disruption and the unexpected turns of events.

Formal or informal hedging may be appropriate. Banks have internal treasury departments that may advise on and provide financial products to manage currency risk. Some non -bank specialist providers, offer similar services. The products are regulated, and specialist advice is required.

The most basic step is customs registration with Irish Revenue. If there is a UK entity or branch  within the group, customs registration with HMRC may also be appropriate, depending on whether that entity will take on UK customs responsibilities. Registration involves the issue of an EORI number. The EORI is based on the underlying VAT and tax number but is not automatically allocated. It must be applied for. This creates a TAN (Trader Account Number) account. I

If the trader is undertaking customs declarations, it must register for direct trader input in Ireland  (and the United Kingdom where appropriate). Although ROS is used in Ireland for some purposes in relation to customs, additional customs linking software is required. This must be licensed. There are approximately have a dozen providers in Ireland and over 100 providers in the United Kingdom. Some providers offer modules connecting both to Irish Revenue and UK HMRC.

Import and other duty applicable and VAT is payable at the point of entry. For VAT registered businesses, postponed accounting applies  from 2021, which  allows deferral of VAT until the VAT return date. If there is an entitlement to reclaim VAT, then this would mean that the import VAT would offset the credit for VAT on purchases.

Duty arise if thee goods are not of qualifying origin (EU,UK and some other countries). Goods coming from GB will not qualify as UK origin unless they are sourced, manufactured or sufficiently processed there. EU content is permitted, but there must still be sufficient UK processing. Equally  Irish exports must be of EU origin to qualify.

An EORI number automatically creates a TAN account. This is the trader’s account number. Customs may be paid directly from the Revenue TAN account.  It is possible to top up the TAN account in various ways. 

Businesses should consider applying for a deferred payment account so as to allow movement across the border without payment on each occasion, if there are likely to be customs duties on their imports. A deferred payment account generally postpones  liability to the middle of the following month and requires a guarantee.  It takes some weeks to process.  

The deferred account requires a guarantee, backed up by cash, a financial institution facility or insurance bond. This entails costs, financial capacity, and an application process to a finance or insurance company in the latter cases. The maximum liability will effectively be treated as drawn from a credit assessment perspective.

Both the UK and Ireland have allowed  postponement of VAT until  the next VAT date for VAT registered traders, which allows offset import VAT against input VAT in most cases. However, in the longer term, this facility may be withdrawn or may become to  subject to a guarantee requirement (as applied to the earlier facility and to customs.

There must be an importer and exporter of record in each case. In some low value low-risk parcel courier cases, the carrier may be prepared to act as a tax agent. Generally, for pallet size consignments some entity in each of Ireland and the United Kingdom respectively must make the export and import declaration or be named as such.

In some cases, the establishment of a company or a relationship with a new intermediary may be required in the United Kingdom. The new entity would require to be registered for UK VAT corporation tax and comply with UK Companies’ obligations. The UK company would have equivalent tax and corporate requirements  in the United Kingdom to those applicable in Ireland.

Traders must decide whether it is possible, practical or economically sensible for them  to undertake customs declarations in-house or whether an external agent such as the freight forwarder, the logistics provider or an independent customs agent should be appointed.

Doing customs in-house requires licensing customs linking software at a minimum. The cost is dependent on use with a fixed licence fee in most cases and average costs falling below five euro per declaration and less with high use. Although some custom software providers also provide customs services, the basic licence fee relates to the use of the software only.

In many cases, it will not feasible for traders to undertake their own customs declarations. Individuals must be trained both to use the software and also to understand the applicable customs and VAT requirements. Moreover, they must be present when the ferry or mode of transport arrives to deal with revenue queries, such as furnishing the invoice and applicable licences.

Making the customs declaration requires certain information at a minimum on the mode and time of transport such as truck registration, ferry or aircraft details and times of arrival. Container and packaging information may be required. In the case of smaller consignments, traders have very little visibility on how and when exactly their goods move. The goods may be taken initially to an intermediary depot perhaps by a smaller scale local haulier  where they are consolidated and then dispatched onwards across the Irish Sea.

Even if declarations are made in-house,  the services of the freight forwarder, logistics provider or other customs agent may be required when interventions are made by Revenue or (UK) HMRC at the port. There is also likely to be a cost incurred with the logistic providers in terms of time and fees in relation to their dealing with the checks  on the conformity of goods with the underlying returns.

Taking on customs compliance obligations is both in novelty and challenge not only for traders but for many in the freight and logistics industry in Ireland. Existing customs agents have very limited capacity to take on the enormous increase in declarations that appears inevitable. Some agents and freight forwarders made investments in advance of the 2019 exit dates only to have to redeploy or make staff redundant.

Freight forwarder range from those who are agents and organise shipments through third party carriers and logistics providers to those who  have their own fleet of vehicles. The range of services offered should be considered with reference to the business’s needs. Existing providers may not be able to offer the required range of services required in the post Brexit environment. It may be necessary to use an alternative freight forwarder or a customs agent or other provider with the requisite capacity.

A freight forwarder should have an established reputation, appropriate financial standing. They should have the appropriately trained and experienced staff in customs matters, facilities at their premises where required as well as having agents and relationships with overseas entities required to complete the movement.

Appropriate communication systems and tracking systems s are essential. In some sectors such as those requiring cold chain maintenance pharmaceuticals, controlled and  dangerous goods, additional facilities and services would be required.

An independent customs agent may work in tandem with the trader and the/logistics provider. There are a relatively small number of customs agents in Ireland dealing with the existing third country non-EU business. They deal at present with exports from Ireland/the EU to third (non-EU) countries as well as imports into Ireland from third countries.

The post Brexit environment will provide a challenge to all industry providers in terms of capacity and the nature of the work involved. Simultaneous declarations and clearances will be required both in Ireland and the UK, which is not a feature of customs practice at present. Most shipments leave from Ireland and the Irish agent has no responsibility for import in the other jurisdiction outside the EU. Equally, on imports, the customs agent is dealing with the Irish import side only at present.

Movement across the Irish Sea will involve considerable challenges. It  will be  necessary to liaise with the corresponding importer or exporter or their agent in the United Kingdom in respect of their customs declaration unless a single agent is acting as an agent for both importer and exporter. A single agent  may not be commercially acceptable  in many cases.

Export clearance in one state is required together with import clearance in the other. It will not be known whether Revenue of HMRC will make an intervention until within about 20 minutes before the ferry arrives.

The terms of business between the  trader and a freight forwarder and / or independent  customs agents will be important. They will provide for the respective rights and obligations and for the level of service to be provided. Given the market position and the risk, they are likely to limit the liability of the provider significantly.

The trader will retain full responsibility to the Revenue and HMRC in respect of all compliance obligations, regardless of the obligations of the service provider. In an audit, all the relevant returns and underlying documents must be available for up to the previous four years. Some revenue documents must be retained for up to seven years.

The terms of business should define the operating procedures. Where, as is likely to be position in most cases, an external provider is used, the trader will have additional costs in compiling and furnishing the relevant data to the freight forwarder logistics provider or other customs agent. The procedures for sharing product information and classifications, establishing value and origin and others produce unique requirements, such as licences,  must be defined and brought into the relevant ordering process

The freight forwarder, logistics provider or other customs agent will be relying on the trader to provide proper information and documentation and for ensuring the conformity of the goods being shipped with what is declared. There is an onus on the trade to take care to ensure the integrity of the information and the correspondence of what is consigned with what is declared.

A certain amount of liaison will be required both in relation to giving the information to make the declarations and in dealing with queries that arise, in particular where there are Revenue / HMRC queries.  This will entail additional resources and costs on the part of the trader. It may be necessary to nominate personnel and contact points within the business.

Responsibility for identifying and maintaining documents must be apportioned. Documents will be required on an ongoing basis as interventions and checks are made by Revenue and HMRC. In many cases, the declarations effectively affirm that certain documents are held so that they can be required to be produced in the event of a documentary check.

The trader remains responsible to the customs authority for the accuracy of all returns. The trader must be able to produce the requisite electronic documents and evidence of compliance in the event of Revenue or HMRC request or in the course of an audit. The relevant data must be available promptly in the event of an audit.

Arrangements should be made to ensure that the freight forwarder or other agent’s records are integrated with the trader’s records. It must be possible to link and cross-reference the documents mentioned in the return in order to satisfy those audit requirements of Revenue and HMRC.

The trader should check and ideally audit,  its agent’s declarations and documents from time to time. The risk is particularly acute as many parties in the customs processes, including trades, agents and revenue will be on a steep learning curve. This will necessarily include inexperienced and perhaps young staff at many levels in a potentially complex environment, with significant scope for liability in the event of an error.

Customs tariffs also referred to as duties or import duties are a tax. It is more likely to be a feature in a no deal scenario than after an EU UK agreement. Even with an agreement, some tariffs might still remain. Tariffs  would also l apply if the goods originate (manufacture etc.) in a third country.

VAT is  collected as part of the customs process. The rate is usually 23%. Although many businesses may reclaim VAT in full, there is  potential for liability for innocent other mistaken declarations and occurrences, nonetheless. Considerable, even in those cases. Revenue undertakes audits and in the usual way can go back for years to check the conformity of paperwork and documents were tax paid.

Although it might be treated less seriously in terms of sanction, there is liability for breach of obligations, even for innocent breaches and even where there is no net loss to Revenue / HMRC. There is no time limit in the case of recklessness or fraud, which may also be subject to serious criminal sanctions.

The customs declarations themselves must include information on the commercial invoice and transport document as well as the relevant licences. The cross-references allow Revenue / HMRC to look at the underlying records, transport, and financial transactions to verify conformity.

There are provisions for administrative penalties and court prosecuted fines even where misdeclarations are innocent. There is provision for interest and tax penalties. Customs law is unusual in that the goods themselves can be subject to forfeiture by way of penalties for breaches of obligations. The forfeiture can be in addition to fines and penalties.

Serious breaches of customs obligation involving dishonest or reckless behaviour have criminal consequences including the possibility of prosecution and imprisonment. Directors of the companies concerned who are knowingly or recklessly party to the misdeclarations may be subject to fines and imprisonment.

At a minimum to will almost always be a commercial invoice that will set out much of the information required to make the import and  export declarations. This is not a legal requirement as such, but its form and content are largely fixed by international trade practice.  There may also be a packing list for larger consignments.

The relevant transport documents such as a CMR road transport note, an air waybill, a bill of lading for shipping a forwarder certificate or receipt will be required to show particulars of the movement. The documents will generally be cross-referenced in the declaration.

Certification of origin is likely to be the critical issue in much post-Brexit trade. The exact requirements for proof of origin will be specified in the EU UK trade agreement. Traditionally paper certification from a governmental body or Chamber of Commerce was required in many cases. This itself required an application on foot of application with  documents to the body or governmental department involved. In order to obtain preferential treatment in some cases, further particular certificates and approvals may be required.

Modern trade agreements are taking a more risk assessment approach to certification of origin. The REX scheme (registered exporter) allows for producers and other intermediaries to certify the origin of goods in many cases. The relevant information by way of a code must be included in the customs declaration.

There are approximately  32 EU directives and regulations in relation to standards for a broad range of commercial and industrial goods. They generally require CE marking of the goods. The directives and the legislation  specify the requirements for certifying conformity with the requirements of the legislation.  In some cases, a declaration of conformity is required. This may have to travel with the goods.

In the case of chemicals, dangerous and hazardous goods there are already significant controls that will increase after Brexit. Specific  documentation is required to travel with  the goods or be available to show conformity with the relevant legislation and requirements.

Many goods are subject to export and import licensing for special reasons. Some of these are on an EU wide basis and some are specific under the United Kingdom or Irish legislation. When legislation applies, the specified licences, certificates or other c

TARIC (the EU customs tariff online) specifies the EU wide licences certificates and restrictions that apply to particular categories of goods. This may be due to such matters are sanctions anti-dumping duties and trade policy measures. Sometimes it is necessary to certify that a particular condition applies so that a licence or certificate is not required. In other cases, it is required to be certified that it is held. It may be requested in a documentary (orange routing) check.

In the area of agriculture, extensive additional requirements apply. Goods must travel from an approved establishment outside the EU and be accompanied by health certificates. The goods must be notified at least 24 hours in advance through  the TRACES or PEACHES system in advance which is a separate system independent of and additional to customs. Very extensive checks are undertaken at the border under the existing EU standard procedures.

The TRACES  and PEACHES returns themselves require certain information which can be logistically difficult to compile. There are relatively few agents who have the ability and capacity to make these declarations so that the cost  incurred may be higher than for customs declarations. A range of additional certificates and licenses are required in the case of agriculture and high-risk food.

There is a range of government support, advice, and assistance for businesses to help them deal with the effects and challenges of Brexit. Some forms of assistance are specific to sectors while others are applicable to all sectors.

The  Local Enterprise Offices, which are based in each council area  run a Brexit Mentor program . The program seeks to assist traders in identifying exposure to Brexit and develop strategies to address issues and maximise potential opportunities. They offer occasional customs training. Some of their general financial supports may be available to deal with Brexit issues

InterTrade Ireland is an all-island body based in Newry established under the Belfast (Good Friday) agreement. The Intertrade Brexit advice and assistance is not limited to traders with North-South issues and is equally available to traders who buy from, sell into Great Britain or are otherwise impacted by Brexit.

InterTrade provides a range of information on its websites including useful tariff checker. Bitesize Brexit has been recently launched to provide focus information on critical issues. It runs events in Northern Ireland and the Republic of Ireland in relation to Brexit matters.

InterTrade’s Brexit advisory service offers SMEs a grant of up to €2,250 (£2,000) to help engage professional advice to get Brexit ready. It also offers an implementation voucher with matched funding up to €5,000 to take further steps to implement the Brexit planning report. The scheme is  available but is not being actively promoted at present pending determination of further trade rules in the EU UK negotiations.

An application must be made for the initial approval of funding. The successful applicant may choose a provider from the panel with whom a Terms of Reference for the scope of the work is agreed for submission to InterTrade for further approval. Upon approval, the works provided for are to be carried out within 2 months.

Enterprise Ireland has promoted awareness of Brexit through its Brexit scorecard. It runs events promoting Brexit awareness. Enterprise Ireland offers online customs training and webinars on some of the critical issues. Enterprise Ireland manages the Clear Customs grant and training programme. This is not active as of early 2020 but is likely to be revived later in the year

The Brexit “Act On” Initiative  has been developed to focus on three main areas of capability (1) Financial and Currency Management (2) Strategic Sourcing and (3) Customs and Logistics.  The courses are delivered in  two half day sessions with an independent consultant. The initiative helps companies decide on specific actions over a short period to address some of the risks and opportunities from Brexit.

Some of Enterprise Ireland’s general grants may be available to support Brexit related issues.

The Department of Business Enterprise and Innovation manages the Brexit loan scheme. Businesses with up to 499 employees who are exposed to the impacts of Brexit and meet certain criteria may apply  for approval to the Strategic Bank Corporation of Ireland.

The loan funds  must be used for future working capital requirements to fund innovation change or adaptation of the business to mitigate the effect of Brexit. They are provided by participating commercial lenders subject to normal approval.

The loan funds are supported by Irish and EU guarantees and accordingly on more favourable terms than would generally apply. 4% maximum interest rate (participating lenders may compete below this level).Terms and conditions have been designed to ensure the loans are accessible. The loans are for up to three years. Loans range from €25,000 to €1.5 million per eligible enterprise. There is provision for unsecured loans up to €500,000