Apparel Sourcing Intelligence - Worldwide

UK hit by EU’s €2 bn bill for “repeatedly ignoring warnings” over trouser tax fraud.

The UK is facing a €1.98 bn bill from the EU for “repeatedly ignoring warnings”  of tax frauds on imported Chinese shoes and apparel. The case highlights grave systemic complications in Britain’s handling of trade which threaten to complicate further its preparations for leaving the EU.

The EU’s case…

The EU’s anti-fraud office OLAF claims  UK customs’ “continuous negligence” deprived the EU of €1.987 billion in revenues in lost import duties between 2013 and 2016 on Chinese merchandise and took €3.2 billion from the value-added-tax income of major EU countries. OLAF has sent a recommendation to the European Commission’s Directorate-General for Budget that the UK government should be forced to pay the €2 billion directly to the EU.

OLAF says a growing amount of Europe’s imports from China began to be cleared through UK ports from 2013, with UK Customs (known in Britain as  HMRC) accepting what sound at first hearing like absurdly low valuation: the example most quoted is ladies’ trousers at €0.91 per kg, compared to OLAF’s estimates of an EU average of €26.09. The more serious allegation is against the UK, rather than the criminals: it is that, in OLAF’s words, “Despite repeated efforts deployed by OLAF, and in contrast to the actions taken by several other member states to fight against these fraudsters, the fraud hub in the UK has continued to grow.” OLAF added that Britain had also failed to open any criminal investigation into the fraud.

…turns into a spat…

HMRC’s reply has been that Olaf’s estimate “is not one that is recognised by our experts who will be challenging their calculations”. It added that HMRC was “considering” OLAF’s findings and recommendations.  To which OLAF in turn replied that it had “repeatedly drawn the attention of HMRC over the last years to the scale of the phenomenon and to the on-going revenue losses”. It states that it has “also alerted the UK authorities to the need to implement EU-wide risk profiles and to investigate the fraud networks active in the UK”. Between governments, this is language not far short of declaring war.

…to which there’s more than meets the eye…

Behind all this there are several different issues going on:

  • The nature of Customs clearance  The numbers quoted by OLAF make it clear that for much of Europe’s imports, the financial risk to governments that Customs have to control is lost VAT revenue, rather than lost import duty revenue. In fact, for the UK, excise duty (the origin-blind tax placed mostly on alcohol, tobacco and petroleum) is also a greater source of revenue from imports than import duty. So the importance of physically checking imports once Britain leaves the EU is not just about import duty: Customs will assess a consignment partly on the total amount of government revenue at stake. If Britain does negotiate a free trade deal with the EU meaning zero duty on apparel, physical checks will still be required on incoming goods.
  • The Channel marks a deep philosophical difference about tax HMRC  prides itself on being “facilitative”: that is, it sees itself almost as responsible for ensuring trade flows freely as for protecting the government’s revenue. That simply is not the view of Douane Francaise, HMRC’s French counterpart, which provided the staff for much of the OLAF investigation. Nothing alleged so far, of course, constitutes judicial proof Europe’s governments have actually been defrauded of €5.2 billion
  • HMRC is under constant cost-saving pressure HMRC is smaller than its Continental counterparts (5,000 Customs officials compared with 15,000 in France) and is required to justify resources spent conducting investigations. HMRC may have misjudged the seriousness of what was going on here – leading OLAF to resent the lack of UK co-operation.
  • Lessons for post-Brexit international relations.  Whatever the rights and wrongs of this case, OLAF and Douane Francaise clearly do believe HMRC is an unreliable partner. So, when after Brexit goods from the UK become subject to Customs clearance on the EU side of borders, EU Customs administrations generally and in particular Douane Francaise (which will become the single biggest clearer of UK exports) are liable to treat goods cleared by HMRC as peculiarly unreliable. This is potentially catastrophic, both for conventional UK-based apparel exporters (like Amazon or Sports Direct) and for UK buyers sending raw materials to manufacturers in the EU and Turkey. Meanwhile, whatever the reason for HMRC accepting valuations of €0.91 per kg for trousers (and there are some perfectly legitimate possible explanations), the likelihood is that it will require far more backup evidence to justify such cases in future, and subject apparel imports to a higher likelihood of stop ands search.

The scandal cannot make life easier for apparel traders. What looks at first like a modest scam has the makings of Customs procedures likely to undermine seriously much of Britain’s apparel industry