The UK’s best luxury and high-street fashion companies are also some of the UK’s leading importers and exporters.
As an independent advisor, we are lucky to have worked with and been behind the scenes at some of the UK’s most reputable high-street and luxury fashion brands. Whilst some comprise hundreds of international stores, multiple distribution hubs and back-office teams strategically placed to manage market conditions around the world, others will operate with far more modest infrastructure, usually with a strong e-commerce presence, minimal store locations and a single operational back-office team pulling the levers for local and export markets.
However, despite differences in scale, there are some striking similarities when it comes to strengths and weaknesses in managing customs and compliance. This article provides an insight into some of the most notable.
1. Recognising the importance of compliance
Let’s be honest, customs isn’t the sexiest topic in the world, and no one grew up wanting to be a ‘Customs Compliance Manager’. Especially given some of the brilliant skilled creative roles to be had within the fashion industry.
However, as competition continues to drive businesses to seek out more competitively priced sources of production and materials overseas, successful creators of apparel and footwear become more dependent on the effectiveness of the logistics and compliance functions within their organisation. Especially when taking into consideration that importers of apparel and footwear are dealing in one of the higher taxed products within the tariff and therefore much hinges on the approach adopted.
Despite most leadership teams agreeing that without a healthy supply chain, the business would not exist, very few companies have the compliance resources to match their volume of trade. In far too many cases, importers and exporters do not retain or even see copies of their customs declarations, despite having made a legal declaration to Customs, consisting of approximately 80 data points, for which they are legally responsible.
Top Trait: By comparison, the most successful importers and exporters have a strong awareness of the high financial and sometimes reputational costs of non-compliance. As such, their structures promote compliance as an essential business function on par with that of finance. The smaller businesses that do not necessarily require a full-time resource often find a greater return on investment by outsourcing some of their activities, whilst larger businesses will often benefit from a full-time member of staff, who may at times require additional support or specific expertise from external specialists.
2. A balanced approach to risk management
Customs compliance and managing customs procedures correctly are of utmost importance. However, given the commercial pressures of a busy retail operation, ensuring good customs compliance can be a tremendous challenge. Therefore, risk management is the crucial skill all successful importers have mastered, whether it’s the element of interpretation involved when selecting between commodity codes with different duty rates, or the decision to trust the country-of-origin statement on a supplier’s invoice. Neither of these decisions is beyond reproach, but both will hopefully have been made using the requisite skills and expertise to strike the right balance of risk.
Top Trait: Leading importers and exporters tend to have implemented standard operating procedures (SOPs) for managing the fundamental compliance risk all importers and exporters face. This allows specialist expertise to be deployed to focus on the areas of highest risk, therefore going beyond the standard approach.
The management of commercial samples is a common risk the fashion industry has exposure to, given the combination of high-frequency transactions and low-value goods means the administrative burden will not often equate to a sizeable financial benefit. Those with larger budgets may write duty on samples off as a cost of business, whilst others will adopt strategies to minimise the cost impact.
3. Strategic sourcing of materials and production locations
In 2023 alone, there were over 1.5 billion UK import customs declarations submitted for apparel and footwear products, providing the evidence, were any needed, of the extent to which retailers are taking full advantage of the opportunity to source and manufacture goods more competitively overseas.
However, international trading arrangements are such that not all of these imports will be subject to the same import duty. Those which are sourced from a country with a preferential trading arrangement with the UK or using materials able to take advantage of extended preferential arrangements (e.g. cumulation), may be 12-16% lower in cost once they have cleared UK Customs.
With so many retailers fighting to retain margin, the option to reduce import costs on apparel by 12% and footwear by up to 16% would in other contexts be seen as a ‘no-brainer’. Sadly, due to the complexity of rules of origin and lacking internal customs expertise, many businesses do not take advantage of these opportunities.
Comparatively, those who consider customs as a part of their buying strategy will, all other things being equal and where possible, select factories, and fabrics to be made, in locations which have a preferential trade agreement with the UK, to ensure import duty is kept to a minimum.
Top Trait: Leading importers are familiar with the most advantageous manufacturing locations and engage with their fabric suppliers before purchase to determine the preference eligibility of their products and ensure they factor any potential import duties into their buying costs.
All businesses can obtain the same information, as a list of countries with which the UK and EU have free-trade agreements is published online and can be used when considering the optimal locations to produce goods. Equally, if you are already manufacturing goods from a country listed and believe you are paying the full rate of import duty, you may be eligible for a reclaim and have the option to recover some of these funds.
4. Recognising classification isn’t as straightforward as it looks
The nomination of a commodity code for customs purposes is a mandatory obligation of both importers and exporters.
However, classification for apparel and footwear is deceptively tricky and small oversights can often lead to large compliance issues. For example, many importers of apparel are not aware of Note 9 within Chapters 61 and 62, which states:
“Garments of this Chapter designed for left over right closure at the front shall be regarded as men’s or boys’ garments, and those designed for right over left closure at the front as women’s or girls’ garments. These provisions do not apply where the cut of the garment clearly indicates that it is designed for one or other of the sexes. Garments which cannot be identified as either men’s or boys’ garments or as women’s or girls’ garments are to be classified in the headings covering women’s or girls’ garments.”
This instruction is important when classifying sportswear, as loose-fitting garments without a closure and clear gender-defining cut may be classified as ‘women's’, despite being designed for and sold to men.
Equally for footwear, the UK and EU provide a different interpretation to the US when it comes to determining the “upper material” of footwear. This can lead to a change in the heading of the classification, which in turn may affect the payable duty rate within the county of import. Businesses working in both geographical markets will have to ensure they account for these variations.
Top Tip: Accurate customs classifications are a product of accurate product master data. By contrast, those with classification issues will often have an equally problematic data capture issue. The most compliant fashion importers and exporters will capture as much information about the product as possible, which will allow for a more accurate interpretation when classifying it. For example, images or technical drawings, a bill of materials with percentage breakdowns by weight, sizes, targeted genders, closures, and technical descriptions.
Automation can be useful for classifying a high volume of SKUs, but, should always be supplemented by a responsible member of staff with adequate training and expertise.
5. Embracing customs as part of a wider strategy
For many businesses, customs clearance is seen as a bureaucratic process that is just another formality when importing and exporting goods. However, aside from the necessary security protocols wrapped up within this process, businesses often overlook the competitive advantage that can be achieved by optimising their customs operation.
For example, few businesses have fully explored their options to use customs special procedures and unlock the duty-saving and cash-flow benefits associated with these authorisations. Very commonly, discussion regarding the use of special procedures is met with concern, having previously been dissuaded by incumbent logistics providers who may not possess the necessary knowledge or expertise to support certain aspects of the options available.
In our experience, there are very few businesses that would not see any benefit from the use of customs special procedures. Regardless of whether the advantages are sufficient to make the grade for this year's business plan, incorporating them within your customs planning is a must. Especially if margin gains and cash-flow improvements are high on the agenda.
Top Trait: Sophisticated importers do not approach customs from the perspective that import duty is payable and instead explore legitimate ways which may allow them to eliminate it altogether. As such, many of the UK’s leading importers and exporters will have a range of authorisations / approvals at their disposal, such as Customs Warehousing (CW), Inward Processing (IP), Outward Processing (OP) and Simplified Customs Declaration Procedures (SCDP). All of which provide some form of duty relief or cash-flow benefit, and therefore a potential competitive, advantage.
There are minimal barriers to entry to access these regimes and businesses of all sizes can benefit. Those previously dissuaded by comments such as “it would be too complex” or “there aren’t sufficient benefits” should be wary of the motives behind them and conduct their own independent research.
Conclusion:
Many lessons can be learned from those who have mastered the craft of importing and exporting within the fashion industry. Nonetheless, there is no single blueprint and whilst the eventual outcomes can be similar, the processes each successful business has adopted to obtain them are often contrastingly different.
In the same way that neglect is not an acceptable excuse for poor compliance, and its associated costs, it should not be an excuse for denying a business the cost-reduction benefits of proper customs planning.
As shown, rarely is the limitation to replicate these positive traits associated with resources or vast amounts of infrastructure. Instead, it may simply require a subtle mindset shift which focuses on extracting the advantages from an existing business obligation.
This article was written by Toby Spink, Director (BKR Consultants Limited).
