The Importance of Correct Customs Classification

How you classify your goods matters, as this affects everything else surrounding your customs procedure. Incorrect classification can lead to delays, cost you financially, or even expose you to legal prosecution in the worst cases.

Therefore, it is essential that you get this right.

In this article, we explore the elements of goods classification and how you can safeguard your business from the risks surrounding them.

Contents:

• What ‘customs classification’ means
• The structure of a commodity code
• How customs classification decisions are made
• What your customs classification affects
• The consequences if you get it wrong
• How to safeguard your business from misclassification
• Customs Support Group – providing customs classification confidence, globally

What ‘Customs Classification’ Means

‘Goods classification’ has a number of related terms, such as:

• Commodity code
• HTS-code (Harmonised Tariff System)
• HS-code / GS-code (Harmonised System / Dutch: Geharmoniseerd Systeem)
• Customs Code
• Statistical Code
• CN-code / GN-code (Combined Nomenclature / Dutch: Gecombineerde Nomenclatuur)
• Taric-code (European Union tariff code)
• Standard International Trade Classification (SITC)

It is important to note that these terms are not all synonymous with each other, despite some overlaps. This is because the names for goods classification codes vary across different regions and code lengths.

In the European Union, the Combined Nomenclature (CN) is used for goods classification, which is an extension of the Harmonised Tariff System. The UK remains mostly aligned with the CN post-Brexit.

When we refer to ‘goods classification’, we are talking about the chosen commodity code for these goods in relation to the procedure that they are being entered into. This is because the same goods can use different codes for different regions or processes.

The Structure of a Commodity Code

In the EU, the UK, and most countries worldwide the HS-code is used as the foundation for good classification. This is a six-digit code, comprised of three pairs: the HS chapter, HS heading, and HS subheading.

For example, the Netherland’s classification for an electric guitar is built on the HS code 92 07 90, with additional digits 10 00 added by the Dutch Customs Authority to create the full 10-digit commodity code:

92 07 90 10 00 = Chapter 92: Musical instruments, parts and accessories of such articles.

92 07 90 10 00 = Musical instruments, the sound of which is produced, or must be amplified, electrically (for example, organs, guitars, accordions)

92 07 90 10 00 = Other

92 07 90 10 00 = Guitars

On this occasion, the UK’s classification is the same. However, they could be different across borders. This is why is it important to double check any classification given to you by a foreign trading partner, as it may be different in your country.

For more details on how a commodity code is structured and when different code lengths are applied, see our article on classification 101.

How Customs Classification Decisions are Made

The World Customs Organisation (WCO) sets rules for goods classification and using the Harmonised system. Within each chapter and section, there is specific information on how to make a classification decision based on your specific commodity and the nuances that can arise.

These rules are too technical to describe here, but here are two of the most commonly referred-to classification rules:

Goods Classification Rule Number One

The titles of sections, chapters and sub-chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided such headings or notes do not otherwise require, according to the following provisions.

The simple meaning: The chapter, heading and subheading titles are for guidance – the full description under a commodity is what counts.

Classification rule number one is the base rule for classifying goods and supersedes all other classification rules.

Goods Classification Rule Number Six

For the classification of goods under the terms of the headers, the wording used for these headings and any relative section or chapter notes is used for legal purposes. The same goes mutatis mutandis for the previous rules, with the distinction that only classifications of similar standing can be compared. For the use of this rule, the terms of the headings and any relative section or chapter notes and, provided such headings or Notes do not otherwise require, according to the following provisions, apply.

The simple meaning: When you are narrowing down your classification choice, only consider options within the same level (chapter, heading, subheading, etc) unless there are notes which indicate otherwise.

What Your Customs Classification Affects

Your commodity code, along with the customs procedure code (CPC), dictates everything to do with your customs procedure. Even a single digit change can have an impact on your:

• Import duties, customs excise, and VAT
• Import and export limitations
• Documentation requirements
• Customs licence and permit requirements
• Commercial policy measures
• Security measures
• Obligations for green supply chain initiatives such as the CBAM or the EUDR.

The Consequences if You Get It Wrong

Using the wrong commodity code carries different levels of consequences, depending on the variance that the two codes have and the reason for the misclassification.

Some examples of your exposure are:

• Delayed or rejected goods, along with storage or destruction fees for the same
• Retrospective payment of underpaid customs duties, which can include recalculations for claimed quotas and preferential origin in addition to base rate differences
• Fines
• The removal of customs permits and licences, such as your AEO certification
• Increased audits from officials
• Legal action against your directors or competent officials
• Bad publicity if the press or courts publish the details

How to Safeguard Your Business from Misclassification

Whether it’s getting legal advice or being able to explain your classification during an audit, there are many things you can do to protect your business from misclassification penalties.

Some best practices are:

• Document the Process: In the event of an audit, you should be able to provide clear explanation of why a commodity code was chosen so that you can demonstrate it wasn’t selected at whim. If there is a mistake in the classification, this will help the officer give you guidance on where you went wrong.
• Binding Tariff Information: Once you have made a decision on your classification, you can obtain legally binding confirmation from the authorities so that you can proceed with your code in the confidence it is correct. This is now called an Advanced Tariff Ruling (ATaR) in the UK.
• Obtain Full Product Details: For composite, assembled, or otherwise technical products, having all the information on hand will help inform your classification decision. Often, the difference between similar codes lies in the details – which may or may not be on the commercial documents.
• Audit Regularly: Commodity codes are subject to change, and each update can render your goods classification incorrect. Periodically check your codes and any changes in the notes to ensure you are not caught unprepared later.
• Use a Professional: Goods classification experts are well-versed with the legalities and nuances of the customs tariff, and will be able to help you avoid risk. From full documentation to obtaining binding information, they’ll work with you and the authorities to safeguard your business long-term.

Customs Support Group – Providing Customs Classification Confidence, Globally

CSG helps you to use the correct customs classification for your goods throughout Europe and globally. Our classification experts use a combination of real experience and leading CustomsTech to map commodities, duty rates, and paperwork obligations around the world – with our clients relying on us to keep their goods moving across borders with minimal disruption.

Contact us today to find out more about what we can do for you.