Cars, machinery, electronics, chemical products, coffee, food, textiles: any UK business that trades these or other goods within the EU or with “third countries” outside the EU must declare this to HM Revenue and Customs (HMRC) to make sure that any import VAT, duty, excise or levies due on the goods in question, either under UK or European law, are collected.
Which duties and controls apply largely depends on the way the goods are classified. For many global trading companies, this is a tedious and time-consuming task. But incorrect product classification can have serious consequences, and businesses are well advised to incorporate error-minimising measures into their risk management strategy. Despite its complexity and being considered a burden by many, classification harbours the potential to benefit businesses from different angles, and there are various ways to optimise its process today.
Cost savings: reflected sourcing and automated classification
Commodity codes are the key classifier in international trade: they determine import and export restrictions, as well as licensing and documentation requirements. They also determine the customs duties to be paid. This in turn should impact on businesses’ purchasing behaviour, as there is a certain potential for cost savings:
Customs duties and taxes are important factors when it comes to deciding from which countries to source products or materials. Let’s say a product is sourced from China and the buyer would have to pay 6% import duty and 25% anti-dumping duty. If the same product could be sourced from, e.g., Bangladesh, where it would be subject to preferential duty rates and minimal (or no) anti-dumping duties, the choice seems to be a rather simple one.
Of course, for customs authorities to apply such preferential duty rates, companies have to prove that the goods really do originate in Bangladesh, and provide all relevant declarations and codes accordingly. This may sound like a simple and straightforward job, but it’s easy to become entangled in a maze of tariffs, codes, and constantly changing preferential origin regulations.
Customs codes are numerical and consist of several digits, which can be difficult to identify – plus, there always seems to be more than one option. In addition, some assume that assigning products and materials to the relevant customs codes only once is sufficient, but that’s not the case.
Unfortunately, changes to commodity codes, preferential agreements, and export control legislation are rather frequent. That’s why it is crucial to regularly check the material master data and ensure the classification of items is in line with the latest regulatory changes, updates, and requirements.
Classifying products in accordance with the Combined Nomenclature (CN) as well as global trade laws and regulations requires a certain level of expertise. Much depends on getting this complex task right, both in terms of compliance and for a company’s efficient handling of procurement and fulfilment. Manually classifying products requires sifting through a nomenclature of 21 sections, 96 chapters, and over 5,000 subheadings in order to find the right code.
That’s where software-supported classification comes in. The right software will help to accelerate – and largely automate – the classification process, based on the relevant information, e.g. legislation, EU dual-use lists or database links. The software can send alerts when new commodity codes come into effect (which happens at the start of every year), and can reclassify products based on legacy data quickly and reliably. It literally pays to automate this task, as you’ll never miss another classification deadline.
More information is available in AEB’s white paper, which explains product code classification, requirements and impacts. The white paper is available at:
https://www.aeb.com/uk/media/white-paper-classification.php.