The customs changes you need to know

Emily Khan:

Welcome to the latest episode of our Business in Focus Podcast. I'm Emily Khan and I'm your host for this episode. Over recent months on this podcast, we've explored some of the biggest trends affecting businesses and actions needed to respond to the risks and opportunities they present. But it's been some time since we've spoken in detail about the topic that at one time dominated that conversation, Brexit. Far from over the start of 2022 has brought with it the full effects of post Brexit border controls, with customs declarations and checks on goods moving between the UK and the EU, now affecting businesses with international supply chains. With the window to prepare for this change now closed, we're starting to see how new policies and processes are working in practice and the stakes are high. Getting it wrong can lead to goods being held at the border and more broadly put the brakes on plans for economic recovery and growth. Today, we'll be working through an essential rundown of the latest position, what this means for businesses and the practical steps we've been helping businesses to implement to avoid disruption to their supply chains. I'm joined by two PwC colleagues, both specialists in this area providing an EU perspective, we're joined by Jos Verstraten from PwC Netherlands, and Matthew Clark will be offering his expertise from PwC UK. Welcome Jos and welcome Matt. How are you both today?

Jos Verstraten:

Good. Thank you.

Matthew Clark:

Great. Thank you, Emily.

Emily:

Well, a very warm welcome from me and I'm looking forward to getting into this conversation and perhaps we can start with why this is all back in the news since the turn of the year, there's been a lot more noise about Brexit, customs, supply chains. It's fair to say that some of us might have tuned that out since it was last so much top of the news list, particularly in light of the pandemic, why should we be tuning back in now. Matt, perhaps you can help our listeners cut through some of that noise and give us a bit of a summary on what's changed.

Matt:

Thanks Emily. It fairly feels like a long time ago now that Brexit happened certainly, Jos and I are dealing with it day in and day out, but you have to remember it's only been a year since this happened. With the new border coming into force, then new customs declaration requirements, people had to pay duty and import VAT for the first time. It was a really new thing and it's still very fresh on the agenda for many businesses. A lot of our clients had only ever traded before within the EU as well, looking at customs declarations and understanding the datasets and things like that, so it was really difficult for them. It's a big adjustment. When you think about it, a year really isn't a long time to implement a change of this scale, let alone really get used to it. You asked what's really changed from the beginning of this year, January 2022. HMRC have ended the concession they provided on delayed customs declarations. So up until now, importers were able to import goods from the EU into the UK and delay the actual submission of their customs declaration to HMRC by 175 days and that's no longer the case.

Now when goods physically land in the UK, you have to have a customs declaration submitted to HMRC and in reality, Emily, what that actually means is, it needs to be pre-lodged in the declarations before your goods arrive at the border to avoid potential delays. We also know that in terms of those delayed declarations, there's got a lot of businesses have quite a backlog of those. They've not kept up to speed and they're now looking back at all those historic imports and thinking right I need to submit these to HMRC, and that can be for the imports into the UK from the EU, but also there's a backlog in terms of movements going from Great Britain into Northern Ireland using that new TSF service. The PwC customs broker service has been helping an awful lot of clients reduce that backlog and improve the customs data issues that they've had and get those declarations into HMRC.

It is a fair few new processes to deal with for both import and export that need to be undertaken for goods that arrive in the UK and apart from the UK. As I said before, not undertaking this process in advance of your goods arriving at the border is what is causing the delays and that's what people might have been seeing in the newspapers or hearing from colleagues or from suppliers or customers. Pre-lodging declarations and getting your data to your brokers early is the way to go with this. Clients are also still struggling with the three basic tenets of customs duty, so the classifications and what's the right 10 digit code and they've been updated in January as well. So, some codes have actually been novated into a new 10 digit numerical code. Struggling to understand origin and how that works on the UK-EU Free Trade Agreement and what value to use when importing their goods. Brexit may have looked relatively straightforward on paper, but it's the practical issues that don't pop up until you actually physically move your goods across the new border, and that's what businesses are really struggling with now.

Jos:

It's also worth mentioning that this is currently all modelled on the existing European legislative framework. It essentially is a copy of the former legislation, and that of course, clearly wasn't the intent for Brexit or the plan direction of travel. Businesses need to remain tuned in because this actually is just the start. There's still a lot to come. This is definitely something to keep on your radar and will remain on the radar for the time to come.

Emily:

Well, thank you both. We've got right into the crux of it there, haven’t we? It really brings to life the way you’re talking about it, not only are we in the throes of this change, and as you say Jos just then at the beginning of a series of changes that we're now starting to really work through the details of how that works in practice. I'd like to pick up on that in a bit more detail and start looking at some other things that businesses are doing to take that concept, as you say that was might have worked on paper to actually make it work for them in practice. You’ve mentioned data, you've mentioned processes, we've touched on policies. Can we give us some examples of that to bring it to life for our listeners.

Matt:

Sure. Let's think about the data. If people haven't seen a customs declaration before, and they weren't really prepared for Brexit, there's over 40 different data points that go into a customs declaration. It's not just about getting the right data, it's how to interpret it. You get the right data, and you understand what that means, how do I turn the data that I have into a 10 digit customs commodity code? How do I then get that right data set in real time to my customs broker? Because they're the people that submit the declarations on your behalf. It's right data in the right hands at the right time to effect clearance, and that can be a real challenge Emily. Lots of clients realise that their data is wrong, when goods have been stopped at the border and especially over the last couple of weeks since some of those numbers on the classification forms have been updated. Goods have actually been stopped when they're trying to get into the UK since the 1st January. Also, your goods might clear, but then post importation, you could get a letter from HMRC asking you to clarify some of the data that you've put onto that customs declaration as a post importation audit. They're the things that businesses are often challenged with.

Declarations now as I mentioned before need to be in advance, you don't have this delayed declaration submission anymore. You've got to plan before your goods move. Ideally before your supplier even begins their dispatch because of course, Jos and I always said one of the reasons we knew businesses were going to struggle with Brexit is, if you're moving something on the high seas, say from the far east to the UK, you might have six weeks to prepare for it to land. If you have something coming over from the Netherlands, Germany, Belgium or France into the UK, it could be less than a day before the goods are shipped from the supplier to arrive at your door. So, you don't really have an awful lot of time to get this right. That's why that process that you mentioned is really important, as well as where is my data and how do I get it to my broker at the right time.

One of the other key challenges that we see is how to value goods landing in the UK. What value should I use if there's a series of transactions. Do I have to adjust my value for transfer pricing purposes? What do I do about royalties? I know today we're not going to dig into the real detail, but there's an awful lot of things to think about across this new border. The last one you said was policy. How is policy developing? Well, if we take e-commerce, for example, the policy is really developing at pace, because there's an awful lot of issues around, is it a low value consignment? Is it a high value consignment? Do I or don’t I pay customs duty and VAT on that? How do I value it? Is it my retail price? Is it my own production price? All those things are feeding into this bubbling pot of policy on e-commerce that both the EU and UK customs authorities are having to deal with and policies genuinely coming out on a weekly basis as we go along. It is all change and it's a moving landscape which I always think it's quite challenging for businesses to operate within. Jos just over to you, if you've got any comments on that?

Jos:

Yeah, I would like to add some things to do that one. One of the other pillars you’ve mentioned is also origin, and of course a lot of people had the idea that initially products coming from the UK might have the opportunity to be imported free of duty in the Netherlands. I just saw a very recent report from Dutch customs that only in the Netherlands in the first 8 months after Brexit, already 120 million Euro of import duties has been collected, so there might be some missed opportunities on that side as well. Of course, all together there's a big catchup challenge down the road for the UK, especially when you look ahead to the licensing requirements, which will hit the food industry particularly hard with new requirements coming in Easter and summer in particular, and while looking at it from an EU and of course, countries like the Netherlands have already had this from day one, the challenge is on one side of this problem.

Emily:

It's fascinating listening to the two of you talk, and there are so many technical terms in here, you talked about transfer pricing, origin, e-commerce. There is almost a new language of business in managing these interactions and transactions across the border. I would like to pick up on a reference that you have both made a couple of times to brokers, and that feels like a role in the economy that we’re hearing talked about more and more. We're hearing a lot about EU businesses struggling to get their goods into the UK at the moment. Perhaps Matt, can you bring that to life for us? What's behind that struggling and where are brokers coming into that?

Matt:

Sure. What a lot of the news in the press is about Emily is that when you are selling goods across the border, so for example, you’re an EU supplier and you've been historically selling quite happily to all your UK customers. Post Brexit, you have to be an exporter from the EU, so you have to submit an export declaration, so let's use the Netherlands as an example. I am a Dutch supplier, I put my export declaration into Dutch customs, and I send my goods to the UK. Someone has to act as the importer on the UK side and a lot of those customers will say, ‘I just want to get the goods at my factory or my premises or my house. I don't really want to be involved in any of its customs. I don't want to be involved in the declaration. I don't want to pay the duties, just do everything, sort it out for me. ‘You're my supplier’ This is forcing the EU sellers/suppliers into quite a difficult situation. Because you can import into the UK as a non-established importer, which means your business is not physically based here and you can do that, but in order to do so, your UK Customs broker has to be willing to act as something called indirect representative. That effectively means Emily that they jointly take on the liability for the compliant nature of your customs declaration and the tax that is paid to any customs duty and import VAT.

Now, an awful lot of brokers in the UK are not willing to take the risk on to do that, because they are jointly or separately liable for any tax payable. It's been quite hard for so many EU businesses to find brokers in the UK willing to act as an indirect representative to help them be a UK importer. The PwC brokerage service, we do that, and we've actually found quite a high number of our clients are EU businesses selling into the UK, doing their own clearance and then making domestic sales to UK businesses. It is quite a significant challenge for certain EU businesses to do that, and Jos, it's the same in the other direction, isn't it? UK suppliers sending things into Europe, particularly and into the Netherlands and trying to find an indirect representative to help him.

Jos:

We see indeed the exact same problem at this side Matt, very correct. The only thing we don't have here is your PwC’s brokerage team. For UK companies selling to the EU and being asked to take responsibility for customs clearance, my advice would be to try and hold off of that and that might be a good moment to think about renegotiating your contracts, with your EU customers, but of course also EU companies aren't really lined up being very enthusiastic about acting as an importer. You still may need to take the role as an importer and sell your goods locally on the EU market. What we see happening there is that a lot of companies are looking at setting up local establishments, an EU branch of a UK company or even a daughter of a UK entity as a local European entity.

Emily:

That’s such a good example of the devil being in the detail which we said at the beginning of making these things work in practice, and how the economy responds to those challenges and you see as you say new actors emerge or different strategies coming into play. I would like to put a question to the two of you that we very often ask in these discussions. When we are talking about disruption, where we can look for opportunity, and I'm conscious we've talked about a lot of different and quite complex challenges, where can we look to find the opportunities here?

Matt:

Emily, it's certainly early days with Brexit, an awful lot of businesses are just trying to keep their goods moving, but they're looking to optimise, aren’t they for the future? Looking further ahead, the UK is trying to agree new free trade agreements. From an export perspective or from an import supply perspective, dealing with new territory, so that might open up places for you to source your goods from or sell your goods to without a duty burden on the landed costs of those goods, that will obviously generate an awful lot more business between the UK and those export markets or supply markets, and they're still in progress. At the moment, there's an awful lot of businesses look into the future and its really long term plans on opportunities as mentioned before, it’s really just keeping goods moving at the moment and businesses are slowly starting to move into optimising their supply chains for the future.

Jos:

I would say all these FTAs etc, definitely something with the look of potential on the long term, but let's not forget that the EU still represents the largest and closest market to the UK. Getting these border things sorted, while it might be painful initially, is still going to give access to that big market opportunity.

Emily:

That feels like a lovely way for us to bring what's been a fascinating conversation towards a bit of a close, we're almost out of time here today. I like to end these conversations with something really actionable and I like Jos your call to action there that it's still worth persisting, it's worth getting this stuff sorted to access that big market opportunity in the EU. Can you give us one or two tips each of you that listeners could be thinking about as they approach that challenge and Jos, I'm going to come to you first this time if I may. What would your tips be?

Jos:

Yeah, thanks Emily. Well, looking back I would say it's been a long period and I tend to say 9 or even longer months of troubleshooting actually. Shouldn't have been that long, but it was extended by the pandemic, but planning is now really coming into scope. I mentioned it earlier in the example regarding origin for example, that still an awful lot of money has been paid upon import of UK products into the Netherlands only, so that must be way more when also considering the other member states. There is clearly an opportunity for planning, looking at the details of transactions like the origin, but I'm pretty sure Matt will have way more practical things to consider at this moment. Matt?

Matt:

I think you’re right, and Jos and I are always on the same page with these things. The first thing you need to do is just get in the basics right, and the basics are that you have the right data that's accurate, and you get it in the right hands at the right time to affect your customs clearances, and that will keep your goods moving. Once you're able to do that as Jos has said and that troubleshooting, firefighting stage is over, then you start to look for ways to optimise your process and your costs, and that might be use of tools or technology to help. For some businesses, they have had to restructure Emily their supply chain or renegotiate their contracts as Jos has said to make it more tax efficient for them. There is a lot of different ways to look into that, but for me it's always, learn to walk before you run, keep your goods moving first, and then this is the year to truly start to examine your supply chains and start to optimise them.

Emily:

Thank you very much. That seems like a really good point for us to end things today. Thank you both for sharing your insight and your passion for customs and helping us join the dots between those big ideas in Brexit and how we deliver the results in reality, some great areas of focus for our listeners there to end on. Thank you, listeners, for joining us. If you'd like to find out more about how to stay ahead of the changing customs environment, then have a look for customs broker service on our pwc.co.uk website, and please don't forget to subscribe to keep up to date with all our latest episodes. Thanks everyone. See you next time.

Participants

• Emily Khan
• Matthew Clark
• Jos Verstraten