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Analysing joint & several liability and the "fall back" method in Customs cases

Posted on 18 May 2023

We are aware of an increasing volume of enquiries by HMRC into customs declarations made by UK-based clearing agents on behalf of importers from China.

HMRC are raising the enquiries on, what they describe as "reasonable doubts" that the value of imported Chinese goods has been under-declared and, that accordingly, additional import duty and VAT are due.

This new initiative from HMRC creates a host of problems for UK-based clearing agents. The first issue for the UK-based agent is that the Chinese importers, who are often Non-Established Taxable Persons ("NETPs"), may only instruct the UK-based agents on an indirect basis. Pursuant to EU law, the UK-based agent is therefore jointly and severally liable for ensuring the accuracy of the declaration made and for the payment of the import duty and associated VAT. Whilst there is supportive case law in respect of the VAT element, the duty aspect is still very much in issue. This issue is compounded by HMRC's blanket refusal to show their workings.

In the absence of the data which HMRC says it requires from the importer and/or UK buyer, HMRC says that it must use the "fall back" method (a.k.a. "method 6") of valuing the imported goods. The problem with this valuation method is that it involves HMRC comparing the declared value of imported goods against what they describe as "goods comparable" with them. HMRC, however, refuses to confirm what these other, supposedly, comparable goods are. This ambiguity leaves clearing agents, who are sometimes met with a C18 demand for the duty and VAT, in the dark in relation to how they might challenge HMRC's valuations.

Further, sometimes there is as little as two pence in the difference between what the importer has declared and what HMRC believe the value of the goods to be. This cannot, on any understanding, lend itself to the conclusion that the goods were imported at a price below the lowest acceptable price.  

To add to the plight of the UK-based agent, HMRC does not accept as evidence information collated by the agent in relation to the value of the transactions in the exporting and importing countries i.e. as between the importer and the buyer(s). HMRC has also failed to consider properly evidence in relation to other commercial factors (e.g. importation costs (and the differences between air, sea, and rail costs), the online retailer's commission, storage costs, postage costs, insurance etc.) which may also affect the import price paid by the UK-based buyer(s).

This evidence is often roundly rejected on the basis that HMRC wants to see the relevant invoices and bank account statements. Given that this money never flows through the UK-based agent's accounts and that it does not, therefore, issue invoices to the buyer(s) of the imported goods, it is virtually impossible for the UK-based agent to obtain the information sought. There is also little incentive for the NETPs to provide the information where the UK-based agent is jointly and severally liable for the duty and VAT.

In effect, the agent is stuck between a rock and a hard place. It will be assessed for the duty and VAT (even if there is supportive case law in respect of the VAT) on transactions which it will not benefit from and upon which the duty and VAT ought to properly be payable by the importer, in circumstances where HMRC will not accept the available evidence contradicting its valuations.

We have also become aware of cases in which HMRC, in similar circumstances as those outlined above, has inspected consignments at the pre-clearance stage for "examination and possible sampling" which invariably leads to it concluding that the import value of the goods has been under-declared.

This exercise is, again, conducted without revealing fully their valuation methods. It then refuses to release the imported goods into free circulation until a security, consisting of duty and VAT, is paid.

The problems here are two-fold: (i) the valuation is made on the same basis as above and rebuttal evidence is, similarly, rejected; and (ii) HMRC's demand for security includes payment of VAT but it has confirmed that the payer would not be able to reclaim the VAT on their next VAT return.

We expect that HMRC's robust response to imports from China (in particular) is motivated by the historic criticism which HMRC has faced from the EU. The EU determined that HMRC had failed to fulfil its obligations under EU law to combat fraud and collect the correct amount of customs duties and VAT on imported Chinese goods. This does not excuse HMRC's current refusal to provide sufficiently clear reasoning for its assessments nor does the approach to seemingly all Chinese imports seem fair.

All of the above leads to the question: what UK-based clearing agent would assist importers who are NETPs in these circumstances? It may be an unintended consequence of the legislation but it is certainly, in our view, unduly restrictive of the trade surrounding the importation of goods from outside the EU or Great Britain.

Mishcon de Reya is currently working on bringing challenges in respect of HMRC's enquiries and assessments in this area. The challenges centre on disclosure of HMRC's valuation methodology and will consider the wider issues of administrative and competition law in respect of the fairness of the legislation in this area.

Should you find yourself subject to a similar enquiry or assessment, please do not hesitate to contact a member of our Tax Disputes & Investigations Team for full assistance.

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