UK businesses underpaid £25 million in import duties, HMRC records suggest

Overall, large UK businesses are suspected of underpaying more than £25.3 million in import taxes between 5 April 2021 and 5 April 2022 – up from just £620,000 in the previous financial year. The jump in the figure, which is referred to by officials as ‘tax under consideration’, comes after the government introduced a new ‘rules of origin’ regime.

The change means that any goods imported into the UK from the EU that do not wholly or largely originate from the EU will attract customs duties when they enter the country. UK firms importing car engines manufactured in France, for example, now face import taxes if the engines contain components made in China.

Steven Porter of Pinsent Masons said the amount of tax HMRC thinks big businesses are underpaying so far on EU imports “might just be the beginning” following the introduction of stricter ‘rules of origin’ requirements on 1 January 2022. After a one-year grace period, UK businesses must now be able to prove exactly where goods imported from the EU to the UK have come from. “Given the significant volume of goods that arrive in the UK from the EU, HMRC clearly sees this as an emerging area of tax risk,” Porter said.

He added: “Some businesses have cited compliance challenges in adapting to the new rules, but this isn’t an excuse that HMRC will accept. Large corporates underpaying tax is one of the biggest areas of concern for HMRC. The biggest businesses can expect to see HMRC continue to scrutinise their imports. The Large Business Directorate is particularly effective at bringing in the underpaid tax it identifies. It prefers to do this through enquiries initially, but it is certainly not afraid to move to large-scale investigations and litigation if it has to.”

Since the end of the grace period, businesses that cannot prove the origin of the goods they import are liable to pay the full rate of customs duty and could face significant penalties. The goods could also be rejected at the border. Totis Kotsonis of Pinsent Masons said that proving the origin of goods to HMRC may be particularly difficult for businesses with long and complex supply chains, and that accurate record-keeping is now critical to avoid having to pay the full rate of import duties.

“The situation is less than ideal for UK businesses that have been accustomed to seamless trading within the EU’s single market. In the current economic climate, HMRC might move a little more cautiously than it otherwise would have done in pursuing businesses that have fallen foul of rules of origins related obligations. But UK exports to the EU are already subject to the additional paperwork and custom checks that post-Brexit trading with the EU now requires,” Kotsonis said.

He added: “It is noteworthy that, earlier this year, the British Chambers of Commerce published a trade manifesto which, among other things, proposed a light touch approach to pursuing businesses that do not comply with the post-Brexit customs requirements. It also proposed that the government should seek to renegotiate the rules of origin provisions in the Trade and Cooperation Agreement with the EU, so as to improve them.”

Kotsonis said: “The problem with this of course is that there is no incentive for the EU to renegotiate the TCA deal, particularly as more EU businesses are reportedly letting go of supply chain arrangements with the UK in search of more convenient alternatives within the EU’s single market.”