Brussels demands €2.7bn from UK for ‘lost’ customs duties

The EU Commission sent a 'reasoned opinion' to the United Kingdom yesterday, 24 September 2018, on account of its failure to act against customs fraud relating to Chinese shoe and textile imports and resulting losses to the EU Budget.

The 'reasoned opinion' is the second step in the formal infringement procedure for this case, which the Commission says it is taking in order 'to protect the financial interests of the EU'.

The timing of the ruling - so close to the EU rejection of the Prime Minister’s ‘Chequers’ proposal for a post-Brexit relationship – is extraordinary.  A political insider commented that: “It is another demonstration of the state of Brexit negotiations.  If the EU can’t trust the UK to play within the rules whilst a member of the bloc, it’s hardly likely to accept a proposal for a future over which it has neither scrutiny nor jurisdiction.”

In March this year, the Commission opened the infringement procedure following a 2017 report by the EU's anti-fraud body, OLAF.  It had found that importers in the United Kingdom evaded a large amount of customs duties by using fictitious and false invoices and incorrect customs value declarations at importation.

The Commission says that further inspections confirmed the very large scale of this undervaluation fraud scheme operating through British ports between 2011 and 2017.

Despite having been repeatedly informed of the risks of fraud relating to the imports of textiles and footwear originating from the People's Republic of China since 2007, and despite having been asked to take appropriate risk control measures, the EU executive says the United Kingdom failed to take effective action to prevent the fraud.

The Commission has calculated that the infringement of EU legislation by the United Kingdom resulted in losses to the EU budget amounting to €2.7 billion (plus interest and minus collection costs) during the period between November 2011 and October 2017.

This may not be the end of the matter as the Commission also said that the U.K. infringed EU laws in relation to the collection of Value Added Tax - leading to additional potential loss of contributions rightfully due to be paid into the EU coffers.  

All EU Member States fall under its jurisdiction - and are liable for the financial consequences of their infringements of EU law.  The United Kingdom now has two months to act - otherwise the Commission may refer the case to the Court of Justice – a case that the EU would clearly like to have settled before Brexit occurs!

The probe conducted by OLAF took place from 2014 to 2016 and focused on the English ports of Felixstowe and Dover, the main entry points for Chinese textiles and footwear coming into Europe.

To reveal the level of abuse of Britain’s customs terms on these clothes, OLAF cited the case of women’s trousers which were declared with a value of 91 cents per kilo, undershooting the market price of cotton at €1.44 per kilogram. The average price for the trousers declared at customs across the EU was €26/kg.

Once the goods entered the U.K., they were “trafficked to members of criminal networks across Europe”.  The fraudsters then set up companies just to take delivery of the goods, according to a joint OLAF-French investigation.  These businesses would then disappear - to be reborn elsewhere.

This strategy enabled the companies to avoid paying VAT because the EU allows importers to pay VAT in the country where they intend to sell it, and not at their port of entry.

John ShuttleworthComment