Senior Accounting Officer – customs duty and excise duty - are you compliant?
September 05, 2014
By Matthew Paul Clark
We’ve recently noticed an increase in queries from clients relating to customs and excise duty. Inevitably, the first question is “are you sure customs duty or excise duty is within the taxes covered by The Senior Accounting Officer (SAO) legislation?”. And secondly ”we outsource our accounting to a reputable third party. Is that enough to meet our SAO requirements?”. To which I reply, yes and no, in that order.
It’s true that since the SAO legislation was introduced, companies that deal in excisable products - namely, alcohol, oil and tobacco - have taken great measures to implement an effective tax control framework with regard to the accounting and payment of excise duty. But can we honestly say that this uptake in implementing an effective control framework and service level agreements with third parties involved in physical supply chains of excisable products is due to SAO?
I’m somewhat cynical in this regard. I believe the primary business driver for such frameworks lies elsewhere. Simply put: the cost of getting it wrong is too high. The rate of UK excise duty can be as much as 75% of the cost of the goods, so assessments are costly, especially when coupled with excise penalties (average penalties raised for careless mistakes being between 15 - 20% of the excise duty assessment).
It’s a sweeping generalisation for me to say excise duty is usually high on the SAO agenda for a business (we do lots of work with clients where this is not the case). But what about customs duty?
It's the poorer cousin of the indirect tax family. Most businesses treat customs duty as a bottom line cost included within the purchase price of their product, with all the thinking undertaken by their import agents. Customs duty rates are anywhere from 0 -14% on average depending on the products being imported and with a relatively lenient penalty regime, customs duty isn't often pushed high up the agenda. It’s only when things go wrong, historic assessments add up and goods are stopped at a port that businesses feel compelled to act. That’s why from an SAO perspective it’s often referred to as the forgotten tax.
Many of our clients have recently been challenged by their customs officer that they do not have any control over the third party customs clearance agent they use to submit their import declarations to HMRC and therefore, can’t be meeting their SAO obligations. I always advise that at least some instruction should be given to a customs clearance agent, at the very least:
- a basic instruction of the value to use (based on invoice plus insurance and freight)
- the origin of the goods (where they were originally made not necessarily the country of export), and
- the tariff classification.
These three data elements determine the customs duty payable. Often agents simply get these wrong and companies pay an incorrect amount of duty. If the third party also helps a business administer a customs duty relief such as Inward Processing Relief or Customs Warehousing, then the risk for inadvertent errors if proper work instructions and service level agreements are not in place significantly increase.
So the overall message is it’s an easy win for HMRC to find compliance issues from a customs duty perspective, it’s one of the few taxes where HMRC have more information than the importing company and it seems to me that officers are also starting to realise it’s an easy area of risk to identify for SAO.
If you want to avoid scrutiny from HMRC and avoid being penalised for the mistakes made by clearance or freight agents my recommendation is to ask yourself the question (and answer honestly):
“Do I really have appropriately documented accounting procedures for customs and excise duty in place?”
Matthew leads our Customs, Excise and International Trade Team in the UK. For more information on the issues contained in this article, please contact Matthew or one of the team.