Incoterms 2010 – Group C Terms – are they useful?

The C Group has the main heading of ‘Main Carriage Paid’, meaning that the main   carriage is paid by the seller. It is a constant within the Incoterms ® rule system that a place must be named when the term is formalised within the contract of supply between buyer and seller. The place named within the C term will always be a place in the country of destination, hence CIF Bangkok, CPT Sydney and so on. This is because the seller has the responsibility for paying the carriage to the point named. As we will see under ‘key points and responsibilities’ there are common confusions and misconceptions related particularly to the C group of terms which prompted the quote from Professor Ramberg referred to at the beginning of this article. Common pitfalls There are 2 groups of C terms . One is intended for use only when the goods are carried by sea (CFR and CIF). The other group (CPT and CIP) can be used for any mode of transport, including sea and multimodal transport. The sea freight terms have the ships rail as a critical point whereas the multimodal terms have delivery attached to putting the goods into the first carrier’s hands. A common pitfall is in not understanding the significant difference between the 2 groups. Without doubt, however, the C group causes considerable confusion in that unlike the other groups E, F,and D there are two critical points instead of one contained within the term. Risk passes from seller to the buyer in the country of departure but freight is paid and arranged by the seller to a point named in the country of destination. The fact that only one place is named in expressing the term, sellers and buyers fall into the trap of regarding that as the only significant point. As if these traps were not enough there is an additional pitfall in connection with insurance, two of the four C terms (CIF CIP) require the seller to take out insurance in the name of the buyer even though risk passes from seller to buyer in the country of departure. Key points and responsibilities under C group terms 1. The seller must contract for carriage to the destination specified in the term agreed in the contract of supply. This applies in each of the 4 group C terms. It is important, however, for the seller to note that two of the terms are intended for sea freight shipment only, these are CIF and CFR. With the sea freight terms the ship’s rail plays a key part as the point at which risk passes from seller to buyer. Real life example: Company H in the UK concluded an order for a New Zealand customer with the Incoterms ® rule CIF Auckland included in the written contract document. When despatch was achieved the goods were sent air freight. Because no ship’s rail was crossed risk effectively did not transfer to the buyer. No damage occurred in transit but the buyer hastened to point out to the seller a lack of compliance in the procedure which could have led to dispute. 2 .  Risk passes from seller to buyer in the country of departure either when the goods are in the hands of the first carrier (CPT and CIP) or have crossed the ships rail (CIF CFR) . Effectively the seller has no risk after these points BUT in two of the terms CIF and CIP the seller has the obligation under the term to take out insurance cover in the name of the buyer, this cover is set out in the Incoterms ® rules published by the ICC, it limits the sellers obligation to taking out minimum cover of the Institute of London Underwriters Cargo Clauses or similar. Further cover must be negotiated by the buyer and seller to cover risks additional  to the minimum referred to. Jan Ramberg has the opinion that this minimum cover comes about because of the sale of goods in transit (as in commodity trading) how, though, he asks, is the seller to know at the outset what the insurance requirements of the buyer are?  He cannot.  Therefore if the buyer requires additional cover it should make it known at the outset. Real life example:  UK buyer agreed the term CIF Felixstowe (Incoterms ® 2010) but realised that they had not understood the extent (or lack of) of insurance cover until the goods arrived from Russia in a damaged state due to ‘civil commotion’ which was not covered by the buyers insurance requirement. It then came to light that the buyer had an insurance policy for goods in transit which covered the cost, the question they were then forced to ask themselves  was “why are buying under CIF when we already are covering the risk with our own insurance ?’ Real Life example:  UK seller quoted CFR and CIF on various export quotations but did not always adhere to the requirement to ship by sea freight, this meant that they were not always able to provide a bill of lading to the buyer. The buyer in one case was not impressed by the sellers’ lack of competence or understanding which turned out to be detrimental to the relationship. Essential differences between the 4 C terms The broad characteristics of each of the 4 groups contained within the new  (2010) set of Incoterms ® rules apply to the terms contained within the particular group, e.g. under the C group terms the main carriage costs must be paid by the seller and risk will pass in the country of departure these are constants. The differences in the 4 terms are significant. Two apply to sea freight and two are multimodal. Two have obligations on the seller to insure the goods. One by one we look at the differences. CFR (Cost & Freight) Main responsibilities of the seller are: •     to contract for carriage •     to deliver the goods on board the vessel with the main carriage paid to the named point in the country of destination •     provide a clean transport document (bill of lading or sea waybill) •     arrange export clearance •     pay unloading costs if for their account under the contract of carriage Remember that, as with FOB, the ship’s rail is no longer the point at which risk passes from seller to buyer as under the 2010 set this has changed to loaded at port of export but this still means that only conventional sea freight should be used under this term. CIF (Cost, Insurance and Freight ) Main responsibilities of the seller are: •     To contract for carriage and insurance (as defined by the ICC rules) •     Deliver the goods on board •     Provide a clean transport document and a cargo insurance policy or certificate •     arrange export clearance •     pay unloading costs if required under the contract of carriage The safe loading on the ship is the key point where risk passes so conventional sea freight is the required mode of transport. CPT (Carriage paid to … named place of destination) Main responsibilities of the seller are: •     To contract for carriage •     Deliver the goods to the (first) carrier •     Provide a usual and ‘clean’ transport document •     Arrange export clearance •     Pay loading costs •     Pay unloading costs if required under the contract of carriage This term applies to any mode of transport. Risk passes when the goods are in the hands of the first carrier CIP  (Carriage & Insurance paid to … named place of destination ) Main responsibilities of the seller are: •     To contract for Carriage & Insurance •     Deliver the goods to the (first) carrier •     Provide a clean and usual transport document and certificate of insurance (or policy) •     Arrange export clearance •     Pay loading costs •     Pay unloading costs if required under the contract of carriage This term applies to any mode of transport.

Remember that the Incoterms ® rules give valuable support to buyers and sellers in establishing responsibilities in international contracts of supply but there are elements of interpretation involved which can sometimes be clarified by reference to the ICC publications referred to in this article.

Incoterms 2010 – Use FCA not FOB terms

Of the three terms contained within the F group two are intended for use only when the goods are carried by sea (but not containerised freight) or inland waterway transport, the other one FCA(Free Carrier … named place) is intended for use by any mode of transport. This differentiation between terms intended for one mode of transport rather than another leads to difficulties when parties confuse matters by using a sea freight term with an instruction to use air freight or deliver to an air freight forwarder at an airport or airport cargo centre. If the shipper air freights a consignment of goods which have been ordered as “Free on Board UK airport” then risk which should pass to the buyer when the goods cross the ships’ rail remains with the seller as there is no ships rail point for the passage of risk from one party to the other. Key points and responsibilities under F group terms. 1    Main carriage (or transportation) is the responsibility of the buyer who must nominate the carrier and be responsible for paying the freight costs from the named point in the country of departure to destination. By mutual agreement the seller can arrange the carrier and transportation but it will be at the buyers cost. Real life example :  In the early stages of supplier/customer relationship it should be made clear who is nominating the carrier and equally important identifying the place where the supplier meets his requirement for delivery under the contract of supply. All 11 Incoterms ® rules must be qualified by stating a specific place. In this example the supplier in northern England merely quoted his Japanese customer “FCA … UK”. This led to confusion as to whether the goods should have been delivered at the suppliers cost to a freight terminal or whether the buyer of the goods was required to collect from the sellers premises. Either of these options is valid under the FCA term but must be agreed at the outset. Vagueness should be avoided in order to prevent argument. 2    Risk (of loss or damage ) transfers from the seller to the buyer when the goods have been delivered to the carrier at the named point. In the 2010 set of Incoterms ® rules published by the International Chamber of Commerce (ICC) the rules relating to loading were made more logical,  ie under “Ex Works” the seller has no responsibility for loading  whereas under FCA (Sellers premises) the seller does have to load. Real life example:  Yorkshire exporter, failing to understand the loading obligation aspect of the FCA term, damaged the goods when unloading them at the nominated point which was a freight forwarders warehouse: by taking on a responsibility which was not incumbent under the term they found themselves liable for the damage incurred.   3    Cost responsibilities pass when the seller has delivered the goods to the carrier at the named place. Essential differences between the three “F” terms The broad characteristics of each of the 4 groups contained within the new 2010 set of Incoterms ® rules apply to the terms contained within it, eg under “F” group terms as described above the main carriage will be paid by the buyer, risk will pass to the buyer at the named point as will costs. This consistency within the group is vital to an understanding of how the Incoterms ® rules system is meant to work. It is, nevertheless, important to see the differences between the terms, with this in mind we will take a brief look at the 3 “F” terms to highlight their essential differences. First of all note that the FAS and FOB terms are intended to be used only for “conventional” sea freight whereas FCA can be used for any mode of transport FCA Free Carrier named place Main points are that this is a multimodal term used for any mode of transport, main freight is paid by the buyer and cost and risk pass at the named point. Export documentation suitable for clearing the goods for export is the responsibility of the seller.  It is important that the buyer gives clear instructions to the seller as to the point of delivery and that both parties agree the separation of any costs that may arise other than those considered normal in such transactions. Real-life example:  The UK seller of goods consigned via air freight FCA (Forwarder’s premises) to an Australian destination. The seller claimed that as they delivered to the forwarders warehouse with the appropriate documentation for customs clearance he should not be charged a ‘handling fee’ by the forwarder. A further question arose with regard to other potential fees for storage and aviation security charges. The dispute was resolved when after considering the wording of Incoterms ® rules it was felt that handling related to customs clearance and should be paid by the seller. Storage in the event of delays in consigning the goods should be to the buyers account as the forwarder is acting for the buyer. Aviation security is arguably a national restriction which should be to the sellers account.   FAS Free alongside ship named port of shipment Main points are that this term must only be used for conventional sea freight or inland waterway modes of transport, main freight is paid by the buyer, cost and risk pass to the buyer when the goods are delivered to the named point. Real- life example:  Seller of the goods delivers to the named port on a Tuesday despite the vessel not loading until the Thursday. On the Wednesday the goods are destroyed in a fire. Who had responsibility for the risk?  The simple fact of the matter was that the seller had not placed the goods alongside the ship as the term dictates, the ship was not there, in the absence of any other considerations such as port practice it had to be that the seller was at risk as delivery had not been achieved in line with the term. The buyer is responsible for giving proper instructions to the seller in respect of delivering the goods to the named point, if the seller is not clearly instructed clarification is required. FOB Free on Board named port of loading Main points are the same as FAS except that delivery takes place and cost and risk pass when the goods cross the ships rail at loading at the port of shipment. FAS and FOB are clearly intended for conventional sea freight (or inland waterway) modes of transport.   Finally the ICC have decided to get rid of the rather dated concept of the ship’s rail point of delivery as the named legal delivery point and where risk passes to the buyer.  These points (after 74 years) are now, under the Incoterms ® 2010 rules when the goods are loaded.  A very high proportion of world freight tonnages is containerised and not handled  by conventional sea freight techniques so other alternatives to the ships rail delivery point are available. Real-life example:  Lancashire seller of textile goods delivered to the port nominated by his USA client but found that the vessel nominated by the buyer was late arriving in port. The seller incurred considerable cost for storage and demurrage charges, the buyer refused to accept these charges and arbitration was called for. It was held that the buyer had failed in his obligation to inform the seller as to the time and place that the vessel was available for loading. The buyer was obliged to pay the additional charges. Those involved in the sale and purchase of goods internationally benefit enormously from having the comfort and protection of Incoterms ® rules, however there is still the need to take account of methods of transport, port practices and the possible advantage for the particular transaction of one Incoterms ® rule over another in terms of security under the contract and ability to meet the obligations of the individual term.

Intrastat Supplementary Declarations – reasonable excuse?

I have always believed that if you had a reasonable excuse for having failed to submit you Intrastat SD on time, then Customs would not penalise you. I’m now told that, except for some very strict ‘events’, there is no such thing as ‘reasonable excuse’.   Is that correct? A.         Yes and no, I’m afraid. The  term 'reasonable excuse' is not defined in law and excuses accepted by HMRC tend to be those which they consider to be reasonable, e.g. mainly those events which are unforeseeable or unusual and beyond your control, although they do say that they will look closely at the circumstances of each case. According to HMRC, a reasonable excuse might involve: a failure in the HMRC computer system, your computer breaks down just before or during the preparation of your online return, a serious illness, disability or serious mental health condition has made you incapable of filing your SD, documents being lost through theft, fire or flood, electrical faults, These are pretty strict examples and could only be invoked if one of the problems listed stopped you from submitting your data. However, each case should be considered on its merits. Other ‘excuses’ have been accepted in the past, such as misleading advice on postal delivery times, or the previous incumbent in the job had failed to let you know that a declaration was due, but these seem a touch tenuous, especially as HMRC emails a reminder about your SD if you’re part of their ‘Alert Service’ . Reasonably enough, HMRC will not accept an excuse as ‘reasonable’ if you haven't made a reasonable effort to submit your data on time. They quote the following as fairly obvious unacceptable examples. You: found the online system too complicated to follow, left everything to your accountant to do and they let you down (NB In this case the law provides specifically that you do not have a reasonable excuse if you relied on someone else to perform any task for you), forgot about the submission deadline, or did not try to re-submit your SD on time once a problem with the IT system was put right .  However, a number of recent First Tier tax tribunals have overturned HMRC’s concept of what constitutes a ‘reasonable excuse’. Excuses tendered for late filing of tax returns, for instance, have been supported by the courts as reasonable, using European Court of Human Rights rulings, supporting the argument that HMRC’s idea of ‘reasonable excuse’ was based on some exceptional circumstance and therefore ‘unreasonable’. In fairness, HMRC do say that if you can show that your conduct was that of a conscientious business person who accepted their compliance obligations, then there may be a reasonable excuse. Remember that HMRC state that genuine mistakes, honesty and acting in good faith are not accepted as reasonable excuses for penalty purposes. But don’t immediately accept HMRC’s decision if you feel you have a valid reason for, say, submitting your SD late. Courts have been showing a trend towards business-friendly rulings, adopting a commercial approach to what is reasonable and this could ‘colour’ HMRC’s opinion. However, remember, ignorance is still no excuse, unless I suppose you can prove that HMRC withheld the knowledge that would have allowed you to comply, but that’s probably unlikely… the small print will find you out! You should make every effort to comply and not rely on the excuse that you had to vacate your premises unexpectedly, due to a plague of locusts… unless of course that’s what happened!

Evidence of Shipment

“Evidence of export consists of two types, official and commercial. For VAT purposes there is no mandatory requirement to retain official evidence of export so equal emphasis should be placed on the acceptance of either official or commercial evidence to substantiate zero-rating. The official and commercial transport evidence must be supported by other supplementary documentation associated with the supply, such as the customer’s order, inter-company correspondence, despatch note, acknowledgement of receipt, evidence of payment, etc.” Full details on the supplementary evidence required are in Notice 703 Export of goods from the United Kingdom. Taken together, the transport and supplementary evidence must show that a transaction has taken place and the goods have actually left the Community. Official evidence is normally: A Goods Departed Message (GDM) where the goods are exported directly out of the UK to a third country destination - see VEXP40400. The GDM is generated by the National Export System (NES) when electronic export declarations are processed. The GDM is only acceptable as export evidence when the Input Customs Status (ICS) code = 60 and the Status of Entry is coded = 8). A certified Export Administrative Document (EAD) also known as the Single Administrative Document (SAD) (Form C88) Copy 3, or NES declaration (as you describe). These must show an official Customs stamp from the office of exit from the EC where the goods exit the EC from another member State. In this case the GDM will show an ICS code = 61 and is not acceptable as official evidence of export unless supported by the stamped copy 3 SAD. Confirmation from the New Community Transit System (NCTS) that the Community/Common Transit (CT) procedure has been discharged. In addition, where an exporter subscribes to the MSS Data to the Trade Service, an MSS report showing ICS code 60 and Status of entry (SOE) code 8 is acceptable official evidence of export. Commercial evidence comprises two types: Primary (eg Master air waybills) Secondary (eg authenticated house air or sea waybills). Along with these transport documents you will also have to provide your own commercial documentation, including payment details, as a basket of evidence.  Ensure the transport documents show clear details of how the goods moved along with the endorsement that they have flown or been shipped.  This is a problem with FPOs because the consignment notes are not acceptable as commercial evidence. HMRC advise that Audit Officers will accept the FPO Global Certificate of Shipment and Air Waybill for VAT zero rating purposes. Also, it is advisable to obtain and retain the Proof of Export (POD) showing the date and signature the goods were received by the customer.

Tariff Classification – Draft Procedure Tips

One of the questions we get asked often by UK companies is:  “how do I put together a written procedure for tariff classification”?  So we drafted out a skeleton around which companies may add their actual procedures.  We thought we’d share it with you, hope the following helps: Introduction: All UK businesses must declare any imports or exports to HM Revenue and Customs (HMRC). This is to ensure that any import VAT, duty, excise or levies due on them under UK and European law are collected. How different goods are classified largely determines what duties and controls apply to them. HMRC uses commodity codes found in the Integrated Tariff of the United Kingdom (the Tariff) to classify individual products. Classification of commodities is necessary for import and export declarations as well as Intrastat returns. Other government departments also rely on Tariff classification for licences and other documents. The Tariff is based on the EU TARIC (Tariff Intégré Communautaire). Member states of the EU hold commodity codes in the TARIC. Commodity codes and other regulations are updated daily, which ensures that importers and exporters can rely on the same standards and treatment throughout the EU. The UK Trade Tariff uses the daily updates of the TARIC directly, so that Tariff users have access to consistent accurate information. The person responsible for tariff classification matters is ******* (include name/position of persons involved) reliant on information provided by purchasing and sales teams as required.  The instructions are issued to all import agents with regard to tariff classification and import entries are received and checked to ensure compliance.  Data is also managed via the HMRC MSS information received. Records of product data and commodity codes are maintained by ******** as well as being listed on the import spreadsheet The tools used when classifying a new product include the HMRC Tariff Book and the www.gov.uk website link.  Full data is obtained from the relevant internal department.  If no obvious commodity code applies then in the first instance the HMRC Tariff Classification helpline is contacted (Tel 01702 366 077).  Depending on this discussion a Binding Tariff Information Ruling (BTI) may be requested.

A BTI is legally binding throughout the European Union (EU) for up to six years after the date of issue and provides the correct commodity code for your goods with a unique reference number.  Once obtained we must enter the BTI reference number in Box 44 of the Single Administration Document (SAD), which must accompany your goods throughout the EU.  BTI’s currently

History of Customs: The mysterious link to Year 3

Anyone who is interested in the history of the Music Hall may know the catchphrase of an old comic legend “Now here’s a funny thing!” (Max Miller – in case you are wondered).  Well, here is a funny things – most of the anniversaries relating to Customs take place in a year ending with a 3.  Here’s a few – 743 -  The earliest written record of Customs dues chargeable on medieval ships is to be found in a Charter dated 743, granted by Aethelbad, King of Mercia, to the Abbey of Worcester.  This allowed the Abbey the dues of two ships: “Which shall be demanded by the collectors in the hithe of London Town”.  1203 - The centralized English customs system can be traced to the Winchester Assize of 1203, in the reign of King John.    1303 -  The custuma parva was introduced by Edward I in the Carta Mercatoria which placed both trade and customs duties on a firmer footing and involved the levying of the Aliens Customs or butlerage, a tax on wine to be paid only by aliens (anyone who is not a national or citizen of the United Kingdom). 1643 - Excise duties on home produced articles were first imposed to provide money for Cromwell's Parliamentary Army and then continued by King Charles II for ‘royal purposes’. Excise duties are inland duties levied on articles at the time of their manufacture, such as alcoholic drinks and tobacco 1673 -  Charles II established the Board of Customs 1683 -  Charles 11 set up the Board of Excise to run alongside the Board of Customs 1803 – The Customs Act passed this year led to the construction of new customs warehouses in nearly every port around the coast of England.  The Act permitted the placing of all types of goods into a customs controlled warehouse pending payment of duty, not just excisable goods 1823 -  The foundation of the modern whisky industry can be dated from this year when an Act was passed to reduce the small stills in the Highlands and introduce not only an annual licence fee for distillers but also a duty on the alcohol produced according to the proof gallon. 1973 -  Purchase Tax was superseded by Value Added Tax (VAT) in the UK.  And, of course, UK joined the European Community (EEC) 1983 – CEDRIC: Customs & Excise Departmental Research and Information Computer – was set up to store records held by the Investigation Division on the Central Reference Unit (CRU) and the manual Investigation Division Indexes. 1993 – the Customs Union was established, bringing with it harmonized customs duties and Intrastat declarations. 2003 – NES was adopted at all airports in the UK

2013 – well, we’ll have to wait and see but we were originally going to get the introduction of the Modernised Customs Code in July 2013.  This has now been renamed the Union Customs Code but changes will probably miss the “Year 3” connection.

Responsibilities under some Customs Procedure Codes

Along with the cash advantages, some of these codes make the importer legally responsible for controlling, reporting or re-exporting the goods within a set time period.  Poor use of CPCs, or a lack of understanding or control, can leave an importer open to Customs audits and potential penalties for non-compliance.  Most of the responsibilities are easy to undertake and control - the most important thing is to be aware of the responsibilities under the CPC you choose.  These are clearly detailed in Vol. 3 of the Tariff. Following are some examples of the responsibilities that may be incurred with a CPC.  1. You must be authorised by HM Customs before you use it. 2. Proof of export will be required when the goods arrive in the UK to allow the relief from import duty/VAT. 3. The goods must be exported within a set time period. 4. After re-exporting a duty reclaim must be made within a stated time. 5. Quarterly reports must be submitted to HM Customs. 6. Good audit records that permit tracking and tracing of imported items may be required. 7. The end-use of the goods is controlled and they cannot be diverted or scrapped without Customs approval. Where appropriate the format of the seven digit CPC’s link the import and the export of goods, so allowing Customs to see that you have fulfilled your responsibilities.  For example:  • Goods imported to be repaired under a simplified procedure will be entered to CPC 51-00-001. When these goods are re-exported from the EC the CPC used will be 31-51-000 - the middle pair linking the export CPC with the reason for import, i.e. 51.  The use of the correct export CPC cancelled the importer’s responsibilities.  If an incorrect CPC is used at export then the importer will have problems.

An understanding of the Customs Procedure Codes that relate to your particular activities is desirable; that is not to say that your current use of CPC’s is faulty or that your import clearing agent or forwarder is incompetent, but merely to emphasise that responsibility and control should rest ultimately in the importer’s or exporter’s hands.

Part 3 – The Beginnings of the English Customs System

We know that Customs duties have been levied in Britain from at least the 8th Century but in fact they are probably as old as civilization itself.  Though there is no written or physical evidence to support it, England must have operated the Roman system of portoria (see earlier blog ) , for the collection of taxes on imports, exports and goods in transit (tolls) as the country (especially Londinium) was an importance centre of commerce and trade for the Roman Empire.  Excavations in Lower Thames Street, London uncovered the remains of a Roman quay, sadly not finding any evidence as to the possible site of a Roman portoria or Custom House, but the Customs Service has been closely linked with the sea, ships, quays, wharfs, warehouses and, of course, goods for centuries, so who needs evidence? The earliest written record in England of actual Customs dues charged is in a Charter dated 743, granted by Aethelbad, King of Mercia, to the Abbey of Worcester.  It allowed the Abbey the revenue from the dues collected from two ships: “Which shall be demanded by the collectors in the hithe of London Town”.   In 745 a further charter, from the King of Mercia again, granted: “the toll and tribute of one ship which formerly accrued to me by rights” to the Bishop of London. Most ancient customs in England consisted of fees, like these, paid by the merchants for the privilege of using the king's warehouses, weights and measures and the name “customs duty” supposedly came from the fact it was an inheritance of the king by immemorial usage and common law, (ie customary) and not granted through statute; this definitely changed going forward when “government” became involved in customs. It was not nationally organised at this time but ran on separate grants being issued at individual ports. (Further other definitions see blog 1) It was in the year 979 that we find real documentary evidence of systemised import duties in England.  King Etheldred established a system at Belingsgate (Billingsgate), in the port of London, for collecting import duties on ships and merchandise.  The duty was levied at:  ½d on a little ship 1d on a larger ship with sails A ship full of wood, one piece of wood as tax Men of Rouen who shall come with wine or large fish shall give a due of 6s Men from Flanders, Normandy and France shall be free of tax. There were other duties on cloth, cheese, butter and eggs.  Even in these early days, with the various exemptions, the duties were complicated to calculate, collect and administer. After the Norman Conquest a type of excise duty was introduced to take tax advantage of the considerable increase in the import of wine, especially from Gascony.  This duty on the new wine importers was called “prise”, collected in kind by the King’s butler  - mainly to supply the King and his Court with wine.  It didn’t take long for the “prise” to change from casks of wine to money – this fiscal tax was called “butlerage” and it survived until the early Nineteenth Century. To see a centralized, formalised English customs system we need to move forward to the Winchester Assize of 1203-4.  The great administrator and tax enthusiast King John decreed that: “the customary dues at the ports”, ie money/ taxes due, should be accounted directly to the State Treasury, payable to the King personally and not through the local lords and sheriffs.  King John should, therefore, be given the credit for establishing a Customs service on a national scale responsible directly to the Crown.  King John’s other major administrative achievements included the establishment of the Exchequer, the reorganization of the Navy and establishing the foundations for a formal national Archives – oh, and annoying a certain hero/robber called Robin Hood. King John’s decree at Winchester Assize established a duty of one-fifiteenth on all imports and exports (called the “quidecima”), led to the formation of a Customs Service when he employed six or seven 'wise and substantial men, well versed in the law' to account to him for the revenue, established ports where goods could lawfully be imported or exported and set up the first know Custom House in very close proximity to Billingsgate.

The next blog will look at these first Tariff Charges and development of the English Customs Service.

Part 2 - Duties, taxes and tolls: so nothing's changed

So, after reading Part One of our History of Customs & Tariff blog  Hyperlink 1, you now know where the first tariff “book” was found (Palmyra/ Syria AD136) and what the words customs, duty, excise and tariff means.  But what we’re talking about here isn’t something with no current relevance; what started centuries ago with the introduction of “customary dues” being collected, based on a menu of costs (taxes), was the systematic taxation of everyday people which continues today. Customs Duties are taxes levied upon commodities imported into or exported from a country and, though no longer important instruments of commercial policy, transit duties or tolls which played a role in directing trade and controlling certain trade routes. Tolls were introduced in the Middle Ages and became very important during the mercantilist period of 16th–18th century, lasting into the middle of the 19th century in some countries.   Duties have always formed one of the most important sources of the public revenue to be used at the rulers’ or governments’ discretion.  Actually the device of raising revenue from the quantity or value of exports and imports occurred naturally in all commercial states in need of money, at a very early stage of its history.  And a big momentum to the growth of these taxes was the need for money to wage war.  It was much later that the charging of customs duty on imports developed from just being an income generator to also being a mechanism  to trying and slow down foreign competition to protect domestic industries.  Gottfried von Haberler in “The Theory of International Trade” (1937) suggested that the best way to distinguish between revenue duties and protective duties (disregarding the motives of the legislators) is to compare their effects on domestic versus foreign producers. Ancient Duties The Old Greeks in Athens imposed a duty of 2% on imports and exports over the Pierian Mountains from which they derived a considerable revenue from their customs.  They also levied an additional duty for the use and maintenance of the harbour (harbour fees). During the Peloponnesian war the Athenians, to replace the tribute paid by their subject states, they introduced a duty of 5% on all commodities exported or imported by such states.  By this means they hoped to raise more revenue than they could via direct taxation. A duty of 10% was established for a time by Alcibiades and other Athenian generals on merchandise passing into and from the Euxine Sea. Chrysopolis, near Chalcedon, was fortified and a “station for the collection of the duties” built. The Romans also levied customs duties, under the name of portoria, these appear to have always existed as we have no record of their introduction and they are referred to in Ancient writings by guys such as Livy.  Portoria were levied on all goods imported by merchants for the purpose of re-sale, including slaves (trade has always struggled with morals), but things imported for the use of the state or for a person’s own use were exempted from it except “luxury” goods such as eunuchs and handsome youths. And along with the Roman duty system came the well know business of … smuggling.  At import or export a list of purchased items had to be lodged with the official responsible for collecting the tax, this official also had the right to search travellers and merchants.  If goods subject to a duty were concealed they were, on being discovered confiscated. (See nothing is new in the world of customs!) So universal did these duties, local and national, become, that every continental nation was fairly covered with a network of customs lines. It is interesting to note though that, despite all these taxes being collected, international trade not only continued but grew. Once introduced, these duties seem to have been accepted without riots and, as they were profitable and difficult to abolish, many of them remain until the present time.

To end this blog here are the words of a customs officer (Veljko Velikić,) from Vršac, published in the magazine “Carinik” (Customs Officer) in November 1926. “Customs profession, one of the oldest trades (emerging immediately after the clerical, ruling and military professions), withstood many turbulences and assaults, but it persevered, survived and developed. The number of customs officers and customs houses reflects the greatness of a state. And there lies also the greatness of the customs profession.” 


Part 1:Customs duty where did it come from?

The Elephant in the Corner - trade regulations

Thanks to the excellent TV comedy “Outnumbered” we are all aware of the “elephant in the corner” – a subject or topic that is in the back of people’s minds but skirted around or avoided as being too delicate, difficult or embarrassing. At a recent BeXA event held at the wonderful Rolls Royce Learning & Development facility in Derby entitled: Innovation in Exporting: the World Awaits – I was asked to do a 10 minute slot on Customs Procedures. I had the worse time slot too, just before lunch, when, if other speakers have over-run (which usually happens) the attendees wish this one would just be cut from the agenda.

What fantastic, inspiring talks – we were entertained and overwhelmed by Simon Topman the CEO of Acme Whistles who explained why they are still producing whistles in Birmingham since 1870 and export 85% of their goods, with an export growth of 27% (6 million whistles exported a year!). Whistles, low technology – you must be joking! His story about the hand-grenadine shaped duck call for US hunters was fantastic. They know that other regions of the world will copy their new whistles in 6 months or so but they stay ahead. Then Paul Titley, Managing Director of a pharmaceutical testing company, Aesica Formulation Development explained how they keep ahead by selling Good Manufacturing Practices (GMP). Graham Tyers, Managing Director of Newson Gale and Mike Norfield, Chief Executive, Team Telecom Group also shared what gives them an edge in the international market place and why they believe exporting keeps their businesses alive. And all the time I’m thinking – customs procedures, rules, regulations, fines, penalties – did they really want to hear from me?

Well, I had prepared the talk in line with the theme of the day “Innovation in Exporting” so I knew I’d surprise a few people when I showed how exploiting your knowledge of customs regulations and being so comfortable with rules, documentation, etc, gives you “an unfair advantage” when trading internationally. But as I listened to the other speakers I realised that the role I, and other trade compliance people, play is the elephant in the corner. Great export deals are done, fantastic innovation, wonderful profits included in contracts but – rules, pre-shipment inspection, certificate of origin, tariff classification – if you squint your eyes in a marketing meeting you can probably just get a quick glimpse of the grey shape in the cornering lifting its trunk to comment before – whoosh – everyone moves on.

Well, it’s time to come out of the corner. Trade compliance is not a nasty afterthought or undesirable necessity it should be part of the planning and marketing strategy. You can’t change a commodity code of a product to get a lower duty rate or reduce licensing regulations (well not legally anyway) but you can change a product or how it is shipped to get a better commodity code (legally). Why just issue a EUR1 Form because your customer asks for one – sell the fact that as we are in the EU and have a trade agreement with our customer’s country our goods will actually be cheaper to import because of this form. Sell the fact! Even increase your price, where you have an option – example a UK exporter sells to Turkey, the standard rate of duty into Turkey for their product is 14%, if the goods can be shipped with a preference form (ATR Form) the 14% becomes NOTHING/ ZERO!!! Isn’t that worth a 1-2% increase in the selling price to make sure the form is produced? Knowledge is power, is an adage often used – well the elephant of trade compliance has quite a bit of untapped knowledge. Invite us to the table.


See other articles by Strong & Herd LLP HERE

Buyers - What do they know about importing? Well!

Once upon a time I became a buyer with the heavy engineering division of a legendary multiglobal Company, I was really proud to be joining an experienced group of well seasoned professionals, they sent me on a 3 day basics residential course and when I returned I was given a desk, a chair and a telephone and was expected to get on with it. I did get on with it but looking back I can see how old fashioned it all was. Jimmy, Ken, Mike and co were very technical and talked about EN8 grade steel and 'Reaming' to their hearts content, they knew about 'tin bashing' and lots of stuff about machining specs and tolerances. Supplier partnerships, Supplier Rating and Supplier selection were rarely, if ever, mentioned, and although a lot of parts came in from outside the UK there was no procedure for controlling the importations. Not only was there no procedure but the system of dealing with paperwork and any additional charges over and above the agreed unit price on the Purchase Order was primitive. Additional costs such as freight, Customs duties, VAT were put under a cost collection code and in due course were paid without query.
"Of course" I can hear you say " that was probably a long time ago and things have changed since then" and it may be true in some cases but when we in our current role of giving training in International trade procedures talk to import staffs in the supply chain we ask them what causes them most problems in their daily work they almost unanimously reply "Buyers !!". They find that their Purchasing people are not comfortable with Incoterms, with Duty Relief options, selection of service providers such as Freight and Forwarding companies aand how to determine the landed value of goods as opposed to the Purchase Order value. If this is true and we believe it to be so then it begs the question "WHY?". The answer would seem to be that Purchasing from overseas is not included in the core training of Purchasing staffs, this in a global market economy seems a glaring omission and is also an indictment of Managements who in turn may have a poor understanding of supply chain issues.
Let's hear from you out there.