The Tariff Code Question That Determines Whether You Overpay or Underpay Duty

Many commodity codes are chosen once and never looked at again, and a wrong commodity code then costs money on every consignment that follows.

A code is usually picked when a part is first imported. Sometimes your freight forwarder suggests it, sometimes the supplier suggests one, sometimes a member of the purchasing team finds one in the UK Integrated Online Tariff. It goes on the declaration, and then on every declaration after that, for as long as the company keeps buying the part. Nobody returns to it, because nothing appears to go wrong. The goods clear customs and the invoices are paid.

But remember, a commodity code is more than a reference number. It is a legal statement of what your goods are, and it determines the rate of duty you pay, whether any additional trade measures apply, whether you can use a tariff quota, whether a licence is required, and which rule you must meet to claim a preferential rate under a trade agreement. If you have the wrong commodity code, you may be paying more duty than you owe on every consignment, or less. A wrong code can also carry the same rate as the correct one while bringing different obligations with it.

A worked example

An importer supplies equipment for computer server rooms. Among its products are moulded plastic panels that fit into the empty slots in an equipment rack, so that hot exhaust air cannot recirculate to the front of the rack and reduce the cooling of the machines.

The panels are declared under commodity code 8473 30 80 00, accessories suitable for use solely or principally with automatic data processing machines. Goods under that code are free of duty. The reasoning is easy to follow. The panels exist only to serve computer equipment and have no other application.

On a compliance check, HMRC takes a different view. Its position is that the panels belong in Chapter 39, plastics and articles thereof, under a line carrying a third country duty rate of 6%. The third country rate is the standard rate, charged where no trade agreement or other measure reduces it.

A post-clearance demand follows, covering the additional customs duty and import VAT on everything imported under that code within the period HMRC can reach back over.

Why the plastics code wins

It looked, to begin with, that the panels were in the correct place. However, when you look at the legal notes for that commodity code, Heading 8473 covers parts and accessories suitable for use solely or principally with the machines of headings 8470 to 8472. Under GIR 1 that heading text is where the question starts. The first thing it asks is not whether the panels are accessories, but whether the thing they serve is a machine of one of those headings.

The panels are fitted to the rack. A rack is not a machine of headings 8470 to 8472. Note 6(C) to Chapter 84 sets out what makes something a unit of an automatic data processing system: it has to be of a kind solely or principally used in such a system, it has to be connectable to the central processing unit, and it has to be able to accept or deliver data in a form the system can use. A rack fails the last two. It holds equipment. It does not process or carry data. An accessory of the rack is therefore not an accessory of a machine of those headings, and 8473 is closed off before any question of what an accessory is.

Nor are the panels accessories of the servers themselves. An accessory has to be interchangeable and has to perform a particular service relative to the main function of the machine it is fitted to, and the panels are not fitted to the servers at all.

They also cannot use note 2 to Section XVI. It is a rule about parts, and it sends a part to the heading of the machine it is solely or principally used with. A part is something a machine needs in order to work, and a server runs whether or not the empty slots around it are filled.

Once the panels fall outside Section XVI, they are classified by what they are made of, which puts them, instead, in Chapter 39.

Four lessons from a wrong commodity code

• An item made solely for a machine is not automatically classified with that machine. It is a common starting assumption and it is often wrong. Sole use is relevant in some places in the Tariff and irrelevant in others, and the section and chapter notes are what tell you which situation you are in.
• Your supplier's code is not evidence. Typically, only the first six digits of a commodity code are agreed internationally. Everything beyond that is national, and a code that works in the exporter's tariff carries no weight in ours.
• A declaration being accepted is not approval. Customs systems check that a code exists and that the documents required against it have been declared. They do not check that the code describes the goods. Years of ‘accepted’ entries prove nothing about the classification.
• In a dispute, the importer has to show the code was right. It is not for HMRC to disprove your classification. If you cannot explain how you arrived at the code, you are starting from a weak position.

What that difference is worth

On £600,000 of imports a year, 6% is £36,000 of duty. Under the original accessories code it is nothing. Across the three years HMRC can normally reach back over, the difference is £108,000. That period extends to twenty years where HMRC considers an offence has been committed.

The direction that never comes to light

Classification disputes reach a tribunal when duty has been underpaid, because that is what HMRC identifies and what an importer has reason to appeal. Overpayment produces no demand, no appeal and no decision. It sits in the accounts as cost of sales, and in most cases nobody looks for it.

Had the position been reversed, with plastic panels declared at 6% when the accessories code was correct, nothing would have happened at all. The goods would have cleared, the duty would have been paid, and the only consequence would have been a thinner margin on every unit sold.

If you have been using a wrong commodity code and paying more duty than you owed, the money is not necessarily lost. Overpaid import duty can be reclaimed, and the time limit for doing so is three years.

Where the original declaration was made in the Customs Declaration Service, the claim is made there. In other circumstances form C285 is used, and HMRC's guidance sets out which route applies. If your business is VAT registered, overpaid import VAT is not reclaimed in the same way. It is adjusted through your VAT return.

A claim needs evidence: the declarations, the commercial invoices, the drawing or technical specification for the goods, and a written explanation of why the new code is correct and the previous one was not. An explanation amounting to a preference for one code over another is unlikely to succeed. One that works through GIR 1, the relevant section or chapter note and the terms of the heading has a far better prospect.

The three year limit runs continuously, so each month a review is postponed is another month of overpaid duty falling outside it.

How much a wrong commodity code can cost

A six percentage point difference is worth finding. Some codes carry a great deal more than a duty rate. Anti-dumping and countervailing duties, safeguard measures and quota limits are all attached to particular commodity codes, and where they apply the customs duty is usually the smallest figure on the demand. Where a wrong code has kept goods outside one of those measures, the sum at stake is no longer a few percentage points of the value.

The liability rests with the importer rather than with the agent who submitted the entry. When an error comes to light, through an audit, a customs health check or a supply chain review, the duty becomes payable with interest, a penalty may follow, and the compliance history then forms part of the assessment of any future authorisation application.

Why a wrong commodity code undermines every duty reduction scheme

Every legitimate method of reducing import duty depends on the commodity code. Classification sits underneath every one of the schemes below rather than alongside them.

• Preference. Trade agreements do not grant reduced duty to goods in general. They grant it to goods that meet a product-specific rule of origin, and those rules are written against HS headings and subheadings. Claim under the wrong code and you are testing your goods against the wrong rule. The goods may genuinely originate and the claim may still be invalid. If you also issue statements on origin to your own customers on the basis of that code, the problem passes down the supply chain with the goods.
• Quotas and suspensions. Tariff quotas and duty suspensions are published against particular commodity codes. If your goods are classified elsewhere, the quota is not available on your declaration, and full duty is paid on goods that could have entered at a reduced rate.
• Special procedures. Inward processing, customs warehousing and authorised use all rely on the codes listed in the authorisation. A code that is wrong in the authorisation puts the authorisation itself at risk, not just one entry.
• Licensing and controls. Import licensing requirements and other import controls are attached to codes in the same way. If the code is wrong, the requirement will not appear against your goods, and you will not know that it applies to them.

Practical steps

• Apply the rules in order. Begin with GIR 1: the terms of the headings, and the section and chapter notes. Read the notes before settling on a description of the goods, rather than after. Errors commonly arise where the notes were never opened.
• Establish the facts first. What is the item made of? What does it do? How is it presented for import? What is it attached to or used with? All the answers are needed, and they should come from the technical specification rather than the sales literature. In the example above, what the panels were attached to decided the answer.
• Do not adopt the supplier's code. A supplier's or exporter's code describes their country's tariff rather than the UK's, and it was chosen to suit their export process rather than your import declaration. Their code is a common source of a wrong commodity code on a UK declaration.
• Record the reasoning. One page for each part number, setting out the code, the rules and notes relied on, the date and the person who made the decision. Since it is the importer who has to show the code was correct, contemporaneous reasoning is worth far more than a reconstruction three years later.
• Consider a ruling for difficult goods. An Advance Tariff Ruling is a legally binding decision from HMRC on the code for your goods, generally valid for three years. It cannot be issued once the goods have cleared customs, and decisions take time, so an application needs to be made well ahead of the shipment.
• Review on a regular cycle. The nomenclature is amended, rates are revised, measures are introduced and withdrawn, and products change. An annual review of your highest value codes is proportionate. On a £600,000 line, a difference of six percentage points is £36,000 a year.

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