Commodity codes are an important administrative tool for regulating imports and exports outside the EU, and businesses have a responsibility to classify their goods using the correct codes in order to avoid potentially costly errors.

With a recent customs duty case highlighting the potential financial impact of getting this wrong, now is an ideal time for organisations that regularly import goods from outside the EU to consider why a proactive approach to managing commodity codes is so vital.

How do commodity codes work?

Commodity codes must be included on customs declarations when bringing goods in or sending goods out of the UK or EU, including any items sent to you from abroad. This ten-digit code provides the following information:

  • The duty costs and VAT ratings charged on the goods in question
  • Whether the goods can qualify for a preferential duty rating under the General System of Preference (GSP)
  • Whether the item requires an import licence
  • Whether anti-dumping duties apply

The GOV.UK website provides information on how to find the right commodity code for your goods, allowing you to find out what duties and VAT rates apply to your transaction.

What happens when an incorrect commodity code is used?

Declaring an incorrect commodity code can be a very expensive mistake for businesses, as demonstrated by a recent tribunal involving SIR Fabrics.

HM Revenue and Customs (HMRC) charged the company with consistently using the wrong code over a period of 10 years, resulting in a substantial underpayment of its duties. In its own defence, SIR Fabrics noted that the business had been visited by HMRC several times during this period without informing them about the incorrect code had been used, arguing that this meant the assessment should be waived.

However, although there are provisions in customs law for duty to be waived where HMRC has made an error, this is very difficult to prove. In this case, HMRC’s lack of active advice on correcting this issue was not interpreted as an “error” by the tribunal.

As a result, the declaration of the incorrect commodity code cost the SIR Fabrics in excess of £218,000 in underpaid duties, which the company was unable to recoup from its customers.

The lesson for businesses

This case demonstrates why it is so vital for businesses to set and regularly review the commodity codes they use in their imports and exports to ensure they are correct. Doing so should be seen as a key priority for proper compliance, and any mistakes made can result in significant costs later down the line.

For more information about proper VAT procedures for international trade, consult our VAT FAQs for import and export businesses, or give us a call on 0333 3638 012.

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