Goods Classification and Commodity Codes

Why is it important to classify your goods correctly?

If you import from outside the EU this is an important subject you need to know. If you are using the incorrect commodity code(s) you could be overpaying or underpaying Duty and VAT.

So what is a commodity code?

Commodity codes are also referred to as Tariff codes or numbers, tariff headings, Harmonised code or HS (Harmonised Standard). Basically they are referring to how your items are classified for Customs clearance purposes. It is called 'Harmonised' because it is the same across Europe and the EU customs union. The commodity code determines percentage rate of Duty on the goods.

So what does a commodity code look like?

The code is a number broken down into chapters with paragraphs and sub paragraphs as they become more detailed. For example - the commodity code for printed books would be: 4901 10 00 00

As illustrated in the HM Tariff below:

Taken from https://www.gov.uk/trade-tariff/commodities/4901100000

How is an item classified?

As very simple example – what is the item below?

Is this a bolt? What is it made of?

Steel? If its classified as steel bolt the commodity code could be 7318 15 62 99 with the duty rate: 3.7%

Nickel? Then it could be classified with the commodity code 7508 90 00 00 with the duty rate: 0%

This is just an example but if you import several thousand there is a big difference between 0% duty and 3.7% duty... so its important to be accurate.

So who is responsible for finding the correct commodity code?

You are as the importer.

Many companies leave this down to their shipping / clearing agents – this can lead to complications very quickly. Shipping / clearing agents specialise in logistics and customs procedures not in your products. They can advise you on a commodity code but ultimately its your responsibility.

For every import you should instruct your clearing agent on which commodity code to use. If you are unsure you can apply to UK customs for a 'binding tariff' - I will explain what a binding tariff is later on in this article.

I leave all that to my shipping agents so if its wrong its down to them

Not quite - your shipping / clearing agent are acting on your behalf. If they misinterpret a supplier invoice and get it wrong who is responsible for the penalties and duty and VAT shortfall?

You are as the importer.

On the customs entries there is a term called ‘Direct Representation’ meaning the clearing agent is acting on your instruction as a representative of your company. Therefore any errors or omissions leading to wrong classification, under declaration and duty and VAT shortfalls will all come back to you.

I don't know how to classify my goods!

If you are struggling to classify your goods I would suggest you apply for a binding tariff with customs. It gives you:

• certainty about the correct tariff classification for your goods
• a commodity code for goods that you import or export
• help to work out customs duties, export refunds, licensing requirements, quotas or other restrictions in advance

What is a binding tariff?

 A binding tariff - also called a BTI (Binding Tariff Information) is a commodity code like I have illustrated above but it is issued by UK Customs. You need to provide photos, technical details of the items manufacture and use, literature and a full description. The more information you provide the better decision Customs can make. You will be issued with a commodity code which is legally binding throughout Europe for 3 years. Therefore if you import the item and there is ever a customs dispute you provide a copy of the binding as support. If Customs issue a commodity code you disagree with you can appeal and ask for a review - you will need to provide evidence to support this.

Examples of queries or mis-classification

There are many examples of commodity codes or the classification of an item being queried by customs in the news, here are just a couple:

December 2016 - Apple iWatch straps. HMRC says the wristband on Apple’s watch should be classed as an “other plastic” import and has hit the product with a 6.5% tariff. However, Apple argues the Apple Watch Sport cannot function without a strap, and that the plastic wristband should be treated like the rest of the watch, which enjoys duty-free status.

Currently going to a tribunal. (read the full news story here: https://inews.co.uk/essentials/news/business/apple-hmrc-row-whether-watch-straps-taxed/)

November 2012 – Set top boxes. Three companies imported identical set-top boxes with a communication function into Bulgaria from Korea under commodity code 8528 71 13, making them exempt from customs duties (i.e., customs duty rate of 0%). Upon inspections, however, the Bulgarian customs authorities disagreed and imposed administrative acts by taking the view that the concerned set-top boxes were not equipped with an integrated modem and therefore should have been classified under commodity code 8528 71 19, making the customs duty rate of 14% applicable.

(read the full news story here: https://www.lexology.com/library/detail.aspx?g=43331ed7-011f-4e3f-8561-feeadc8a8ed7) 

Incorrect classification and use of the incorrect commodity code

If your goods are being declared wrong you could well be under paying or over paying Duty and VAT - neither are good for your business in the long run.

What if I'm under paying duty & VAT?

You may think you are saving in money but this will be checked by your local customs office and at any point along your supplier and customer chain this could be queried by Customs. If you are found to be under paying due to misclassified goods (i.e. wrong commodity code) you will have to back track up to five years worth of imports and pay all outstanding duty & VAT within 30 days. If Customs deem you were doing this knowingly then you will receive heavy penalties too.

What if I'm over paying duty and VAT?

Just as importantly if your goods are classified incorrectly and you are paying a higher Duty rate than is required you are losing money. If this is the case you will need to work with your shipping / clearing agent and again backtrack through the past five years worth of imports and check each one and then try to claim for the Duty overpayment. Obviously providing adequate proof (technical literature and / or a customs ruling). Then set up a procedure check all future imports.

Neither case is ideal so acting sooner than later and getting an accurate commodity code is the best business practice.

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