Inward and outward processing are types of relief that apply to goods that are brought in and processed, allowing companies to claim VAT and duty relief.
Two of the Chartered Institute of Export & International Trade’s customs specialists, Maighdlin Gibson and Garima Srivastava, answered members' questions on both forms of processing on a recent Lunchtime Learning webinar.
Q: What is the definition of “processing” in customs?
Maighdlin Gibson: “‘Processing’ means any alteration of goods, any transformation of goods in any way, or any subjecting of goods to operations other than for the purpose of preserving them in good condition or for adding or affixing marks, labels, seals or any other documentation to ensure compliance with any specific requirements.
“‘Commercial processing’ is defined as when, if the original commodity code is changing, goods after delivery become part of a product after being manufactured, processed, assembled, in such a way that their identity is lost in the product.”
Q: What authorisation do I need to get?
MG: “For inward and outward processing, traders have two options available: authorisation by declaration or full authorisation.
“Authorisation by declaration can be made first, is done three times a year on a rolling basis and must be less than £500k in total.
“Full authorisation is needed if more than three declarations are needed every year.”
Q: Can I get a retrospective authorisation?
Garima Srivastava: “Yes. Generally, an authorisation can be retrospectively applied from the date on which the application was accepted. In exceptional circumstances, HMRC may allow for up to one year from the date of acceptance.
“A retrospective authorisation can be made to cover any time gaps between when an old authorisation and a new one is applied for and issued.”
Q: Can I send goods outside of the UK for part of their processing?
GS: “Yes. Goods can be moved in and out of IP until the item is finished, or the UK part of the process has been completed.
“Let me give an example: Company A is based in the UK and makes light sensors for digital microscopes. They import the unfinished microscopes from Company B in Germany using inward processing.
“Once the sensor has been installed, the microscopes are then sent to Company C in Italy for lens to be installed. At this point they are discharged from inward processing and moved into outward processing.
“When the lenses have been installed the microscopes return to company B for calibration and testing with their sensor. Upon reimport, the goods are discharged from outward processing and entered back into inward processing. After testing and calibration, the microscopes are then discharged from inward processing and sent back to Company B in Germany for sale.
Q: What steps should I take when goods are damaged while under a customs special procedure, such as customs warehousing or inward processing?
GS: “If goods are damaged while under a Customs Special Procedure, inform HMRC as soon as the damage is discovered.
“In addition, document the extent and nature of the damage. Take photographs and prepare a detailed report outlining how and when the damage occurred. Update your records to reflect the condition of the goods, including any losses in value or quantity.
“HMRC may permit any adjustments to duty and VAT liabilities. Damaged goods may be eligible for a reduction or relief on duties and taxes.”
Q: If I send goods for repair under outward processing and the item is found to be beyond economical repair, what actions should I take?
MG: “First and foremost, it is important to notify HMRC about the situation and provide documentation from the repair facility stating that the item is beyond economical repair. It is also crucial to maintain detailed records of all communications, documentation from the repair facility and customs declarations related to the repair and subsequent decisions.
“If returning the goods to the UK, submit a re-importation declaration specifying the condition of the goods and noting they are beyond repair. You may apply for duty relief based on the original export declaration and outward processing authorisation, demonstrating that the goods were intended for repair but are now beyond economical repair.”
Q: What are the key points traders should focus on to ensure accurate customs declarations and compliance with HMRC requirements?
GS: “To ensure accurate customs declarations, traders should focus on the following key points. Think of this as a checklist:
- Use the correct commodity codes for goods based on the UK Global Tariff, ensuring accurate duty and VAT calculations
- Declare the correct value of goods, including cost, insurance and freight (CIF) where applicable, and ensure consistency across all documentation
- Provide detailed and accurate descriptions of goods, including quantity, weight, and dimensions, to avoid misclassification or delays
- Include accurate information on the origin of goods, supported by certificates of origin or preferential trade agreements, if applicable
- Stay informed about changes in customs regulations and ensure all declarations comply with current laws and HMRC guidelines
- Maintain comprehensive records of all customs declarations, including invoices, shipping documents, and proof of compliance, for at least six years
- Use customs declaration software and the CDS system to streamline the declaration process and reduce the risk of errors”
Q: What are the possible penalties HMRC can apply for non-compliance with customs special procedures, and how can traders avoid them?
GS: “HMRC can apply several penalties for non-compliance with customs special procedures. Traders may face fines for incorrect or incomplete declarations, late submissions, or failure to comply with authorisation conditions.
“Penalties can vary depending on the severity and frequency of the non-compliance. Persistent non-compliance can lead to the suspension or revocation of special procedure authorisations, affecting the trader's ability to benefit from duty deferments or suspensions.
“HMRC can demand payment of unpaid customs duties and VAT, including interest and additional charges, if non-compliance results in underpayment.
“In severe cases, HMRC may seize goods that do not comply with customs regulations, resulting in financial loss and operational disruption. In cases of fraudulent activity or serious breaches of customs regulations, traders can face legal prosecution, resulting in significant fines and potentially imprisonment.”