Customs valuation

Method 1 - Transaction value

Information about method 1, transaction value.

Summary

Method 1 is the first method an importer must try when valuing their goods for import to the UK. The customs value is based on the price actually paid or payable for the goods when sold for import to the UK with various adjustments. An importer should concentrate on considering whether an acceptable transaction value exists in relation to any particular terms of trading and trading arrangements, before examining the other methods.

Price paid or payable

As per Section 16(3) TCTA the value of the imported goods is known as the ‘transaction value’. This is the price paid or payable by the buyer to the seller for the goods when sold for import to the UK adjusted in accordance with Regulations 111 to 113 and 115 to 118 CIDEER. It includes all payments of a condition of sale.

Example

Company A imports and sells game consoles to retailers in the country of importation. All game consoles are bought from one overseas supplier, Company B. There is no relationship between Company A and B for the purposes of Regulation 108(9) and 128 CIDEER. Company A pays Company B £500 for each game console. The importer presents to UK customs authorities a declaration of value based upon the transaction value, together with the documentation relating to the sale of the game consoles. The transaction value is to be determined under Method 1, the transaction value method. The price paid or payable for each game console is £500 as this is the total payment made by the buyer, Company A, to or for the benefit of the seller, Company B, in respect of each game console.

Sale for export

Definitions

‘Sale’ is not defined within the GATT. However, it is to be given its broadest sense (Advisory Opinion 1.1). It must be established that an actual sale, across international borders, has taken place before application of the transaction value method. For example, goods imported on consignment cannot be deemed a ‘sale’, and nor can a purchase order as a non-binding agreement between parties. 

WCO Advisory Opinion (AO) 1.1 defines the term exportation as ‘the act of taking any goods out of the Customs territory’. If it is not already clear, to show that goods were sold for import to the UK they should either be:

• manufactured to UK specifications
• identified as having no other use or destination - for example, by marks on them
• manufactured or produced specifically for a buyer in the UK
• ordered from an intermediary who sources them from a manufacturer who then ships the goods direct to the UK

Which sale to use

The transaction value is the price paid or payable by the buyer to the seller for the goods when they are sold for import to the UK as per TCTA s16 (2)(3). This must be the last sale for import to the UK, that is, the last sale that occurs immediately before those goods are brought into the UK. Most transactions will simply involve the seller in the country of export and buyer in the UK, however GATT Article VII does not stipulate that the sale must occur in the country of exportation. The WCO further demonstrates this point in Advisory Opinion 14.1:

‘…there is no need that the sale takes place in a specific country of exportation.  If the importer can demonstrate that the immediate sale under consideration took place with the view to export the goods to the country of importation’

However, if a series of sales occurs, it may be necessary to determine which of these sales needs to be considered when determining the last sale for export. Any series of sales will include a last sale occurring in the commercial chain prior to the introduction of the goods into the country of importation and an earlier sale. The last sale in the commercial chain is not necessarily the last sale chronologically.

The use of the last sale for export ensures that application of valuation Method 1 takes into account the entire commercial transaction at the time of acceptance of the customs declaration, as well as of the other elements of the transaction value, for example, additions and deductions. As such, where it is not possible to use the last sale for import to the UK, valuation Method 1 cannot be applied. 

Please see WCO Commentary 22.1 for further information.

Example 1

Scenario - if the last sale is before the goods are exported to the UK

Companies A and B are both based in a third country. 

Company A sells the goods to Company B for £1,000. 

Company B then sells these goods for £1,200 to Company C, the importer, that is based in the UK.  

The goods are imported into the UK.

Valuation treatment

The £1,200 transaction between Company B and Company C is a sale for import to the UK. This is because it resulted in the goods being exported to the UK and it was the last sale before the goods were brought into the UK. This is the sale to use under Method 1. 

The first transaction for £1,000 cannot be used. This is because it is not the last sale before the goods were imported into the UK. Also, it cannot be demonstrated that it was a sale for import to the UK.

Example 2

Scenario - if there is a sale during the journey

Company A is based in a third country and Company B is based in the UK. 

Company A sells the goods to Company B. While the goods are being shipped, Company B then sells the goods to Company C, the importer, before the goods arrive in the UK.

Valuation treatment

The sale from Company A to Company B is a sale for export but it’s not the last sale before the goods were brought into the UK. The sale from Company B to Company C is the last sale for import to the UK. This is the sale to use under Method 1.

Example 3

Scenario - Company A is based in a third country and Companies B and C are based in the UK

Company A sells the goods to Company B. While the goods are being shipped, Company B becomes unable to fulfil the contract. Company A then sells the goods to Company C, the importer, before the goods arrive in the UK.

Valuation treatment

The sale from Company A to Company B is a sale for export but it is not the last sale before the goods are imported into the UK. The sale from Company A to Company C is the last sale for import to the UK. This is the sale to use under Method 1.

Example 4

Scenario - if there is a sale after the goods have arrived in the UK while in a customs warehouse

Company A sells the goods to Company B. 

Company B then sells the goods to Company C before the goods arrive in the UK. After the goods arrive in the UK, they are placed in a customs warehouse. While in the customs warehouse Company C sells the goods to Company D who release the goods to free circulation and complete a customs declaration.

Valuation treatment

The sale immediately before the goods were brought into the UK is the sale between B and C. This is the sale for import to the UK. This is the sale to use under Method 1. 

Company D, can only use Method 1 in this situation if they can get the invoice for the sale between Companies B and C. 

If Company D cannot get this invoice, they cannot use Method 1 and must now work through the other methods.  

Please also see WCO AO 14.1 for further examples.

Example 5

Scenario - if there is a series of sales

Company A is a retailer located in the UK, Company B is a distributor located in the USA, and Company C is a manufacturer located in China. There is no relationship between A, B, or C. 

On July 10, July 2024, Company A contracts with Company B for the purchase and sale of personalised pen drives:  

• A agrees to purchase 200 pen drives from B for 400 USDs
• each pen drive will display A’s branding
• B can obtain the pen drives from any pen drive manufacturer
• the pen drives will be shipped directly from manufacturer C to A in the UK 
• title passes from B to A when the goods are loaded on the ship in China
• payment is due within 30 days of shipment

On 12 July 2024, B contracts with manufacturer C for the purchase and sale of personalised pen drives:

• B agrees to purchase 200 pen drives from C for 350 USDs
• each pen drive will display A’s branding
• C will ship the pen drives directly to A
• title passes from C to B when the pen drives leave C’s factory
• payment is due within 30 days of shipment

On 10 August 2024, C ships the pen drives to A. On 20 August, the pen drives arrive in the UK and A files a Customs entry. On September 1, A pays B 400 USDs. On 5 September, B pays C 350 USDs.

Valuation treatment

In this example, the last sale is the one between A and B and the first sale is the one between B and C. 

Normally the buyer would be located in the country of importation and the price actually paid or payable would be based on the price paid by this buyer. In a series of sales situation, the price actually paid or payable for the imported goods when sold for export to the country of importation is the price paid in the last sale for export, occurring prior to the introduction of the goods into the country of importation, instead of the first or earlier sale.  

In the example, the sale between A and B represents the last sale for export in the commercial chain, even though it is the first sale chronologically. Therefore, the price actually paid or payable for the imported goods when sold for import to the UK  400 USDs, the price A pays B in the last sale.

Restrictions of sale

When an importer is using Method 1 to value their goods, there must be no restrictions on the buyer’s disposal or use of the goods except for those laid out within Regulation 114 CIDEER. These restriction exceptions include those which:

• are imposed or required by law or by the public authorities in the UK
• limit the geographical area where the goods can be resold
• do not substantially affect the value of the goods

It is usually quite clear what constitutes restrictions of a legal nature, restrictions of the use of chemicals, medicines or means of transport because of legal requirements relating to health, environment, or transport security. These kinds of restrictions generally do not affect the price of the goods because they apply to every importer who releases these goods for free circulation. Similarly, restrictions of a geographical nature are easily identifiable, such as a seller restricting the geographical area in which goods can be sold by the buyer as they sell to several distributors, each with their own sale area, who don’t want the others affecting the sales in their territory. 

Restrictions which do not substantially affect the value of the goods can be harder to define. Two cases in which the value is not substantially affected are an embargo on displaying motor cars before a specified date or a cosmetics manufacturer stipulating that a particular distribution chain of house-to-house sellers is used. A restriction that would substantially affect the value of the goods is one not usual in the trade. For example, where a machine is sold at a nominal price on the condition that it is only used for charitable purposes.

Examples of restrictions which can be ignored when deciding if Method 1 can be used include: 

• an official licence is needed to trade in the imported goods
• the goods can be sold only in the UK
• the goods cannot be sold before a certain date - for example, cars which cannot be sold before the start of the model year

Where a sale is subject to conditions which restrict the disposal or use of the goods by the buyer which fall outside of the above exceptions, the transaction value may not be used, and Method 2 must be tried.

Example

Scenario

Company A based in a third country is the parent company or headquarters of multinational group which is engaged in the manufacture and sale of products containing an important technical component. The group operates through a network of subsidiaries, which include manufacturers and wholesalers, some of which are based in the UK.  

Company A grants a license to manufacture mobile phones in the UK to its Subsidiary B, fixing a license fee of 5% of the clear net sales. 

B subcontracts the manufacture of the mobile phones with another Subsidiary C, also based in the UK, on condition that C sells the whole production to B. C must first sell the product to B and then repurchase the goods from B, the latter achieving a margin of 15% of the selling price from C. 

Subsidiary C imports the technical components for the manufacture of the subcontracted mobile phones, from Company A into the UK.

Valuation treatment

Under the arrangements Company A has established for the sales among its subsidiaries, goods are sold for the prices agreed among the companies of the group. In addition to the price paid for the components from Importer C, Company A will get a license fee amounting to 5% of its net sales as an additional payment from B.  

Buyer C must sell its mobile phones to another specific UK subsidiary B, which implies a restriction for the disposal or use by the buyer.  

Case study 3.1 of the WCO TCCV provides a number of examples of circumstances which do not represent a restriction or condition within the meaning of Regulation 114 (2)(a) CIDEER.

Conditions of sale

A transaction value is not acceptable under Method 1 if the sale or price is subject to a specified matter for which a value cannot be readily determined and it is deemed a significant element of the value of the goods, as per Regulation 108(6) CIDEER. When the value of a specified matter can be readily determined with respect to the goods being valued, such value should be regarded as an indirect payment to the seller and therefore added to the price paid or payable.  

The WTO provide some examples of conditions which would not be acceptable under Method 1: 

• the seller establishes the price of the imported goods on condition that the buyer will also buy other goods in specified quantities
• the price of the imported goods is dependent upon the price or prices at which the buyer of the imported goods sells other goods to the seller of the imported goods
• the price is established on the basis of a form of payment extraneous to the imported goods, such as where the imported goods are semi-finished goods which have been provided by the seller on condition that the seller will receive a specified quantity of the finished goods

Example

Scenario

An importer buys lenses of a type that requires an adapter to fit the lens to the camera with different mounts. The seller offers a mount adapter at half the normal price for each zoom or mirror lens ordered and confirmed with an invoice during the period of a special promotion programme. To take advantage of this offer, the importer has to order zoom and mirror lenses exceeding a specified quantity or make an additional order exceeding a specified amount. 

The half price adapters are invoiced at the discounted price; however, this discount is not shown separately on the invoice. The Method 1 customs value declared by the importer is based on the reduced price. The importer states that the same number of lenses and mounts are bought over a period irrespective of the cost of the 2 items and claims that the price reduction is a quantity discount.

Valuation treatment

The reduced price cannot be used to determine the customs value under Method 1 because it is conditional on the purchase of other goods. However, the customs value can still be determined under Method 1 because the amount of the conditional discount is known. Therefore, the importer can work out the Method 1 value by using the price paid on the invoice plus the conditional discount. If the conditional discount value was not known, then Method 1 would not be applicable.

Where the importer and exporter are related

If the importer is related to the exporter the price paid or payable can be accepted under Method 1 if the importer can show that the relationship has not affected the price. 

One way the importer can do this is by applying the ‘tests’ for comparison purposes. 

The importer needs to show that the price they paid to the seller is close to:

• the transaction value of identical goods exported to the UK, in sales between buyers and sellers who are unrelated - when compared with goods they are valuing, identical goods must be: 

  • produced in the same country 
  • exported to the UK at or about the same time 
  • the same in all respects including physical characteristics, quality and reputation although minor differences in appearance do not matter 

• the transaction value of similar goods exported to the UK, in sales between buyers and sellers who are unrelated - similar goods are those which are different in some ways from the goods to be valued but they: 

  • are produced in the same country 
  • can carry out the same tasks 
  • are commercially interchangeable 

• the customs value of identical or similar goods arrived at under Method 4 (deductive method) 

• the customs value of identical or similar goods arrived at under Method 5 (computed value)

The ‘test’ values must have been accepted by HMRC at or about the same time as the importation of the goods to be valued. 

HMRC may also decide to examine the circumstances surrounding the sale to determine if the transaction value is acceptable. 

In practice HMRC are seeking assurance that the importer does not receive preferential treatment under the inter-company pricing arrangements because of their relationship with the exporter.  

The importer could provide information which demonstrates one of the following:

• importer and the exporter trade with each other as though they are unrelated 
• importer pays the same price as unrelated buyers in the UK operating at the same commercial level and purchasing similar quantities of the goods 
• the price the importer pays is ‘full value’ as per CIDEER (it’s a commercial sale where the importer and exporter have acted independently without influencing the transaction value)

When considering whether a transaction is fully costed, HMRC may take account of additional information volunteered by the importer in the form of transfer pricing studies conducted by independent third parties. HMRC are not obliged to take this information into account. If HMRC have grounds to consider that the price is affected by the relationship, HMRC will tell the importer what these grounds are. If a trader requests it, this will be in writing. 

The importer will have a reasonable opportunity to respond. 

If it is finally concluded that the relationship has influenced the price, Method 1 cannot be used. The importer must then try Method 2 (transaction value of identical goods).

Related parties legal definition

The relationships which give rise to parties being deemed related for customs purposes are laid out within Regulation 128 CIDEER as seen below:

1. (1) Persons A and B are related persons for the purposes of this Part in the following cases:

2. (a) where B is a body corporate, A is an officer of B
3. (b) A and B are partners in the same business
4. (c) A is an employee of B
5. (d) the same person controls a business carried on by A and a business carried on by B
6. (e) A controls a business carried on by B
7. (f) A and B jointly control the business of another person
8. (g) A is a member of the same family as B

1. (2) For the purposes of paragraph (1): 

2. (a) a person controls a business carried on by another person where the latter is accustomed to conduct the business in accordance with the directions of the former 
3. (b) a person also controls a business carried on by another person where the control is exercised through a third person who acts on that person’s direction
4. (c) where a business is carried on by a company, a person controls that business where that person holds 5% or more of the voting rights in the company
5. (d) a business referred to is not limited to a business involved in the importation of the chargeable goods presented to Customs

(3) In paragraph (1)(g), ‘A is a member of the same family as B’ where a relationship exists directly or indirectly between A and B which arises through blood, adoption, marriage, civil partnership or co-habitation

The relationships included within Family are laid out in Notices made under the Customs (Import Duty) (EU Exit) Regulations 2018 and include:

• spouse or civil partner 
• child or step-child 
• grandchild 
• brother or sister (including half-brother or half-sister and step-brother or step-sister) 
• parent or step-parent 
• grandparent 
• aunt or uncle 
• niece or nephew 
• cousin 
• mother-in-law or father-in law 
• sister-in-law or brother-in-law 
• son-in-law or daughter-in-law 
• co-habitation

Additions and deductions

When valuing goods under Method 1, not only the price paid or payable for the goods themselves needs to be included, but other items which add to the value of the goods being imported. As per Regulation 108 (5) CIDEER adjustments to the value of the goods must be made to include or exclude elements of the value that have not already been taken into account. Adjustments are made because businesses trade with each other in different ways. The law aims to provide a level playing field to all importers regardless of how they trade. Adjustments are designed to negate differences in price due to differences in trading arrangements, not for those due to the buyer simply making a better deal with the seller. For example, Buyer 1 pays the seller £150 for 100 cups and the transport of the cups to their business in the UK. Buyer 2 pays the seller £100 for 100 cups but arranges separate transport for the cups to their business in the UK and pays £30 to a third party transport company for this. Assuming the terms of the goods and transport are the same, the purchase of goods is the same. It would not be fair to charge duty on a price paid or payable of £150 for the first seller and £100 for the second. Adjustments made under CIDEER level this out so that both buyers pay the full value of the goods. Therefore, Buyer 1 pays duty on £150 and Buyer 2 pays duty on £130.  

CIDEER allows for the transaction value of elements not already accounted for in the price paid or payable, to be adjusted. Regulations 111 to 113 CIDEER lays out what items need to be added to the value of the goods if they are not already included. Regulations 115 to 118 CIDEER lay out what items are to be excluded from the value of the goods if they have already been included.

Transport costs

All costs of transport, including loading and handling, up to the place of introduction into the Customs Territory of the UK are to be included in customs valuation, as per Regulation 111 CIDEER. 

If the actual charge for transport can be established at the time of importation this must be used as the basis for calculating the amount to be added to the value of the goods. However, no addition is required where the terms of delivery are CIF or post-CIF.

Air transport costs

A table detailing the percentages which represent the part of air transport costs to be included in the customs value can be accessed at Air Transport Costs.

Air transport cost apportionment

Where the actual cost of air transport is known, the air transport cost (ATC) element can be apportioned to exclude the UK freight. 

Where an air waybill accompanies a Cost, Insurance and Freight (CIF) invoice, only the actual air freight can be apportioned. Air waybills must show the International Air Transport Association (IATA) rate. However, some suppliers do not cost the IATA rate into the CIF value. This can be because the airline grants quantity discounts or the exporter does not pass on the full cost of the freight. In such cases the air waybill cannot be used for ATC apportionment. If the actual amount costed into the invoice price can be distinguished and attested to, if necessary, the ATC apportionment can be used.  

If the goods are carried by 2 or more means of transport, for example sea and air, then the freight bill may be for the total journey. For example, goods shipped from Tokyo to Seattle and then flown to the UK. If the cost of the different transport elements cannot be separately distinguished, then the whole sum can be apportioned as if the entire journey had been by air. This only applies where the delivery terms are pre-CIF. For example, Free On Board (FOB), ex-works. If the invoice is CIF or post-CIF, then only the amounts costed into the value for air freight can be apportioned.

Demurrage costs

Demurrage is a cost which may be incurred when the movement of goods is delayed. Demurrage costs incurred before the goods have arrived in the UK are to be included in the customs value as they are considered to be part of the delivery charges. Demurrage costs incurred after the goods have arrived in the UK are not to be included in the customs value as they come under the heading of post landing charges.

Rail transport costs

Rail transport costs only need to be included up to the place of introduction of the imported goods into the UK border. All inland transport and associated costs in the country of export must be included in the customs value.

Transport costs included in the total freight charge

UK transport costs included in the total freight charge can be deducted if they are charged separately and can be distinguished. 

If the transport is free or the importer provides their own transport, they must include in the customs value the amount for transport costs to the UK border. The importer can calculate this amount by using the freight rates tariff for the type of transport used, for example IATA rates for air transport costs and conference rates for sea.

Packing and container costs

Packaging and container costs of the goods being imported must be included within the value of the goods, as per Regulation 111 (1)(a)(b) CIDEER.

Containers

The cost of containers should be added to the value if they are treated as being one with the imported goods. In this context containers means those that the importer gets with the goods. They are part of the consignment, but the importer may pay extra for goods to be delivered in containers. For example, liquids can be priced by volume. The importer may pay extra for it to be delivered in bottles. This does not include costs for larger items such as freight containers which are usually hired and are considered part of transport costs. 

Where containers are for repeated use, for example, reusable bottles, the importer can spread the cost of re-exported containers over the expected number of imports.

Packaging

Packing costs include both materials and labour. The cost of packing should be added if it is not already included in the price paid or payable. 

Packaging, such as beer bottles or plastic crates that are to be returned to the seller in another country are included within the definition of packaging. If this packaging is itself dutiable the packings must be chargeable to duty at the rate applicable to the goods contained therein. However, where the packings are not included in the price payable for the goods but are to be returned to the seller in another country, and the buyer is required to pay the seller financial compensation in respect of packings that are not returned, such compensation constitutes a cost on the valuation of goods for customs purposes.

Apportionment of insurance

Insurance is a charge connected with the shipment of the imported goods and, therefore, forms part of the overall transport costs due to be declared for customs purposes at the time of importation. Insurance costs up to the time the goods are imported into the UK are to be included in the customs value as per Regulation 111(1)(c) CIDEER. The inclusion of insurance in the customs value is limited to insurance costs incurred for the goods during their transportation, loading, unloading, and handling. Any insurance costs incurred after the goods are imported into the UK can be excluded from the value of the goods as per Regulation 115(1)(d) CIDEER.  

If the goods are insured, there will usually be a contract of insurance. It will show how the premium was calculated. From this, it should be possible to calculate how much of the cost should be included in the Customs value of the goods. The importer can apportion the cost of insurance.

Insurance premiums

Any insurance premium including suitably apportioned global policies, incurred for the transport of imported goods is to be included in the customs value.  

Sometimes goods are invoiced on delivery terms, whereby the seller has to procure insurance against the buyer’s risk of loss of or damage to the goods during carriage, but the buyer also procures insurance. This results in a ‘double’ insurance situation, but in the event of loss or damage, legally only one claim can be made. In this scenario, only the cost of the seller’s insurance is to be included in the customs value. The additional buyer’s insurance is a form of reassurance in case of default on the seller’s insurance rather than an insurance cost relating to the goods.

Apportionment of premium

When insurance covers transport after introduction into the UK, apportionment of the premium is allowed if the actual costs can be distinguished.

Types of insurance policy

The types of insurance policy are:

A. general policy under which insurance costs are separately distinguished for each importation

B. global, blanket or block policy under which the premium is determined either: 

• by applying an agreed percentage to the insured value
• set annually

For costs incurred under (a) and the first bullet point at (b) the actual amounts can normally be determined at the time of importation. However, for costs under the second bullet point at (b) apportionment to individual consignments will be necessary. A worked example can be found at delivery costs to include in the customs value under the heading ‘which insurance costs must be included and can be excluded’.

It is necessary for annual insurance premiums to be apportioned on an entry-by-entry basis for declaration at the time of importation. Where premiums for the current year are not known, apportionment may be based on the previous year’s figures.

Assists

Types of assist

Equipment supplied by or on behalf of the importer

An assist can involve equipment being supplied by or on behalf of the importer. These items are provided in order to facilitate the manufacture of the imported goods, for example tools, moulds, dies or processing machinery. The cost of the equipment, exclusive of the freight and insurance costs to the manufacturer’s premises if separately distinguished, is to be included in the customs value of the imported goods.  

If the importer acquires the equipment from a seller not related to them at a given cost, the value of the equipment is that cost. If the equipment was produced by the importer or by a person related to them, its value would be the cost of producing it. If the equipment had been previously used by the importer, regardless of whether it had been acquired or produced by them, the original cost of acquisition or production would have to be adjusted downwards to reflect its use in order to arrive at the value of the equipment.

Materials supplied by or on behalf of the importer

Materials are often supplied by the importer (or from a third party on behalf of the importer) to the seller or processor either free of charge or at a reduced cost. The full cost of production or acquisition of these materials is to be included in the customs value, whether incorporated in the imported goods or consumed in their production.  

Outward freight and insurance are not to be included in the value of the materials supplied by the importer. The exception to this is when the goods are acquired at a cost, insurance, and freight (CIF) price and the outward freight and insurance is not separately distinguishable. In this case the outward freight and insurance is to be included in the value.  

Similarly, when goods are sent to the manufacturer or processor from a third party, the outward freight and insurance are not to be included in the customs value for the imported goods. However, when the charge for the goods from the third party includes freight and insurance to the manufacturer’s or processor’s premises, and these costs are not distinguishable from the value of the goods, no deduction is allowable for outward freight and insurance.

Engineering, development, artwork, designs, plans and sketches

When engineering, development, artwork, design, plans, and sketches, carried out outside the UK, are provided by or on behalf of the importer, free or at a reduced cost, their value is to be included in the customs value of the imported goods. This takes account of the fact that the value of these items has not already been included in the price paid or payable. Where a charge is made to the importer for these cost elements, the charge is to be included in the customs value. This applies even when the work is undertaken in the UK.

Research and preliminary design sketches

The cost of research and preliminary design sketches is not to be included in the customs value. Preliminary design sketches instruct the manufacturer as to what to produce rather than how to produce the imported goods. In this case it is necessary to separate the cost of preliminary design sketches from the cost of other design work. The law relating to preliminary design differs to that of other design work. There are no definitions of the two types of design. It is, therefore, necessary in all cases to establish at which stage design work necessary to produce the imported goods is provided.

Designs, drawings and sketches, provided free of charge to exporter under a licence agreement between importer and third party

Designs, drawings and sketches, provided free of charge to the exporter under a licence agreement between the importer and a third party can be treated as an assist in these circumstances rather than a royalty. For example, an assist is if the licensor provides the licensee, either directly or indirectly, with drawings, designs, or instructions for manufacture of the goods, or computer programs for incorporation outside the UK in memory chips. The drawings, designs, drawings and sketches are passed to the manufacturer so that they can produce the specified items. The cost or value of these assists is to be included in the customs value of the imported goods unless the work involved was undertaken in the UK. WCO case studies 8.1 and 8.2 provide examples of royalty or licence fees being treated as ‘assists’.

Tooling

The cost of tooling provided by, or on behalf of, the importer in connection with the imported goods must be included in the customs value. The costs may be apportioned over the total volume of goods imported or declared in full at the time of the first importation, providing the goods in question are liable to ad valorem duty at a positive rate. Tooling charges are to be included in the customs value as part of the total payment for the imported goods.

Research and development provided by the buyer

Where research and development work is carried out within the UK and is being provided, directly or indirectly, by the buyer of the imported goods free of charge or at a reduced cost, the value of such work is not dutiable. 

Where the work is carried out outside the UK, the value of the development work necessary for the production of the imported goods is dutiable. However, the value of the research is not dutiable. It may be necessary to separate the value of the research from the value of the development. 

This is to be done by applying generally accepted accounting principles. The value of the development work applies to the cost of developing the product itself rather than only the manufacturing process. 

Thus, it is to be based on the total cost of the design portioned as appropriate to the imported goods and not only the cost of preparing documents, for example, drawings or specifications.

Research and development provided by the seller

Where the seller of the imported goods includes the cost of research and development within the invoice price, there is no provision within the law for excluding the cost of pure research. 

In such circumstances the buyer receives nothing for the payment made other than the goods. Thus, the total payment made is regarded as the contract price for the goods and is dutiable in full.  

It does not matter if the seller raises a separate invoice for the cost of research or identifies the research cost as a separate line item on the invoice or expresses the research cost as a percentage of the invoice price for the goods.  

In all these instances the cost of research is regarded as part of the transaction value for the goods. It does not matter where the research work is carried out. In these circumstances the condition of sale argument applies.  

However, if research costs are invoiced separately and the buyer does receive valuable consideration other than the goods, in return for meeting those costs, then such costs would not be dutiable. This may arise where the seller agrees to give the buyer the option to purchase, distribute or manufacture any products which may result from the seller’s research activities.

Apportionment for equipment

The cost of assists may be apportioned over the total volume of goods produced or to be produced by the equipment. An allowance should be made for any items produced but not imported into the UK. Importers may experience difficulties in such an apportionment. The importer or declarant may opt to declare the full cost of the equipment on the first entry on which ad valorem customs duty is paid.

Royalties and licence fees

Definition of royalties and licence fees

Royalties and licence fees shall be taken to mean payment for the use of rights relating to:

• the manufacture of imported goods (in particular, patents, designs, models and manufacturing know-how)
• the sale for export of imported goods (in particular, trademarks and designs)  
• the use or resale of imported goods (in particular, copyright and manufacturing processes inseparably embodied in the imported goods)

Usually, royalty or licence fee payments are made periodically (for example, monthly, quarterly or annually). Sometimes the payment may take the form of a single lump sum, or even an initial lump sum (commonly referred to as a ‘fee for disclosure’) followed by periodic payments thereafter. The payments are usually calculated as a percentage of the proceeds of sale of the licenced products.

Link between the sales contract and the royalty or licence agreement

In many cases, the contract of sale for the goods does not explicitly mention that a payment for royalties or licence fees has to be made for the goods. Normally when royalties and licence fees are payable, the arrangements are set out in a separate formal written contract or agreement which usually specifies in detail the licenced product, the nature of the rights assigned and know-how provided, the responsibilities of the licensor and the licensee and the methods of calculation and payment of the royalties or licence fees.

Conditions under which the royalties or licence fees must be added to the price paid or payable

According to Regulation 113 CIDEER the royalties or licence fees must be added to the price paid or payable only if:  

• the royalty or licence fee relates to the goods being valued
• such payment a condition of sale of those goods in the agreement between the buyer and seller for the import of the goods into the United Kingdom

For example, when a machine manufactured under a patent is sold for import to the UK at a price exclusive of the patent fee, which the seller has required the importer to pay to a third party who is the patent holder, the royalty should be added to the price actually paid or payable in accordance with the provisions of Regulation 113 CIDEER, since the payment of the royalty by the buyer is related to the goods being valued and is a condition of sale of those goods.

The royalties or licence fees are related to the goods being valued

In order to establish the extent, if any, to which the value in respect of which royalties and licence fees are paid, is related to the imported goods, the first question to be resolved in all cases is the true reason for the additional payments. 

The assigned right for which a royalty is being paid may reside: 

• wholly in the imported goods 
• partly in the imported goods and partly in other things (for example, in ingredients or component parts added to the goods after their importation)
• wholly outside the imported goods

The fact that a royalty is paid by the buyer to the seller is not in itself sufficient reason for assuming that the whole or indeed any part of it is necessarily related to the imported goods and therefore is to be included in the customs value. Rights for which royalty or licence fees are paid will vary and may include one or more of the items shown below.

Royalties for know-how

The importer is often required to pay a royalty or part of a royalty in respect of technical information or ‘know-how’ supplied by the seller. Claims that the royalty or part royalty does not relate to the imported goods may be accepted where it can be established that the particular information or ‘know-how’ has to do with something clearly unrelated to the imported goods and that the amount paid is reasonable having regard to what is supplied. Claims made for exclusion of payments for the provision by the seller to the importer of information necessary to assemble or use the goods for the purpose for which they were designed are not acceptable. Payments made (whether the full royalty or only part) for technical information concerning a process or operation that is specialised in itself, are excludable from the customs value (for example, the importer may be able to show that the process could be carried out by similar goods obtained from other suppliers, who manufacture them without specialised information from the licensor or the importer). Some licence agreements (for example, in the area of ‘franchising’) involve the supply of services such as the training of the licensee’s staff in the manufacture of the licensed product or in the use of machinery or plant. Technical assistance in the areas of management, administration, marketing and accounting may also be involved. In such cases, the royalty or licence fee payment for those services would not be eligible for inclusion in the customs value.

Rights of reproduction

Royalty payments for the right to reproduce the imported goods in the UK are excludible from the customs value provided that they are shown separately from the price paid or payable for the goods.

Right to distribute

Payments made by a buyer for the right to distribute or resell the imported goods are not to be added to the price actually paid or payable for the imported goods if such payments are not made as a condition of the sale for import to the UK of the goods.

Patents

Whether imported goods are complete (including kits for assembly) or sub-assemblies, components, parts or ingredients, it must be established wherein lies the right or speciality for which the royalty is paid. The position must be resolved in each individual case on the basis of the best information obtainable. This will vary considerably in complexity. At one end of the scale will be found the simplest case involving goods imported complete, which incorporate the whole of the speciality value. In such cases the whole of the royalty payments however expressed must be taken into account when determining the customs value. At the other end of the scale, because the imported goods are common place articles having no speciality value and the royalty relates wholly to post-importation operations or added ingredients or components, no part of the royalty is to be included in the customs value. This also applies where the imported goods are specialised only in the sense that they are made to a specification (for example, non-standard sizes of nuts and bolts). If there is any doubt, patent specifications need to be examined.

Research and development

Sometimes the royalty or licence fee is paid to finance research and development costs incurred by the seller as licensor or for the supply of technical information about the use of the imported goods. These costs are usually incurred before any product containing special features is produced commercially. Most, if not all research and development royalty payments are to be included in the value for customs duty providing payment can be related wholly to the imported goods. Further guidance on the treatment of research and development costs, that are not the subject of a royalty agreement, can be found under the assists section.

The buyer must pay the royalties or licence fees as a condition of sale of the goods

Royalties and licence fees are considered to be paid as a condition of sale for the imported goods if: 

1. the seller or a person related to the seller requires the buyer to make this payment 

2. the payment is made to satisfy an obligation of the seller

3. the goods cannot be sold to, or purchased by, the buyer without payment of the royalties or licence fees

1. The seller or a person related to the seller requires the buyer to make this payment

This requirement means that royalties and licence fees are to be included in the customs value if their payment by the buyer to the seller is required by the seller as a condition of the sale of the imported goods.  

Royalties or licence fees which the buyer pays directly or indirectly to the seller or to a licensor who is related to the seller can normally be regarded as being paid as a condition of sale even when the fee is not payable until after the goods are resold, used, or otherwise disposed of after importation. A typical situation in which a person related to the seller may be regarded as requiring the buyer to make the royalty payment is, for example, when the goods are bought from one member of a multinational group and the royalty is required to be paid to another member of the same group.  

When royalties are paid to a third party which exercises direct or indirect control over the manufacturer or seller, resulting in a conclusion that they are related such payments are regarded as a condition of sale. One person shall be deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter. 

In case of a royalty or licence agreement, the licensor to whom the royalties or licence fees are paid to, normally has a need to control the manufacture of the licensed products to a certain extent in order to protect their economic interests. For example, when the licensor directs the manufacturer or seller in their methods of production, logistics, sourcing of materials or, the administration of the manufacturer at some point it can be concluded that the relationship in exists between the licensor and the manufacturer or seller.

2. The payment is made to satisfy an obligation of the seller

If payments are made to a person who is not related to the seller, they are only included in the customs value when the seller requires those payments to be made i.e., payments are made to satisfy an obligation of the seller. This would be the case, when the seller enters into a licence or royalty agreement with the owner, or the holder of certain intellectual property rights and the buyer of the imported goods makes the licence or royalty payments to that person on behalf of the seller.

Example

Scenario

Licensee takes out a license agreement with a licensor for branded t-shirts. As part of this licence agreement the licensor requires the licensee to use a template for their agreement with their manufacturer which stipulates that the manufacturer must only produce the licensed goods for the licensee and supply them only to them. The manufacturer is not related to the licensor in the meaning of Regulation 128 CIDEER. The products are neither created nor developed by the licensor. The licensor receives the royalty or license fee from the licensee after the resale of the products.

Valuation treatment

The manufacturer is obliged by virtue of a manufacturing agreement to sell the goods only to the licensee, who in turn pays royalties or license fees to the licensor pursuant to the license agreement. Therefore, the goods covered by the license agreement may be sold by the manufacturer only to licensees designated by the licensor. The obligation to conclude a manufacturing agreement (or the obligation for the exclusive delivery to the licensees) is set up by the licensor, who is therefore guaranteed to receive royalties and license fees for all the goods supplied by the manufacturer. The licensee cannot purchase the goods in question without payment of the royalties or license fees to the licensor. Therefore, the payment for the license or royalty fee is a condition of sale and must therefore be included in the customs value.

3. The goods cannot be sold to, or purchased by the buyer without payment of the royalties or licence fees

The royalty or licence fee payments may also be considered as a condition of sale if, in fact, the buyer could not acquire the goods, or the seller could not sell them without the royalties or licence fees being paid to the licensor or a sub-licensor. The buyer does not have to pay the royalties or licence fees directly to the licensor. Also, indirect payments are considered, for example a payment from the buyer to a third party who submits the amount to the licensor, or from a party related to the buyer to the licensor or to the third party.  

If it is evident from the circumstances and conditions of sale and the licence agreement that the goods could not be sold to, or purchased by the buyer as they are, without breaching the contractual arrangements between the parties, if the royalties or licence fees were not paid, the payments are considered to be a condition of sale and consequently they shall be added to the price paid or payable. 

In most cases the royalty or licence fee agreement explicitly prohibits the production of the licensed goods unless the royalties or licence fees are paid. In these cases, it can easily be concluded that the seller could not sell, or the buyer could not buy the goods without breaching the contractual arrangements between the parties which require the payment of the royalties or licence fees. This condition can, however, also be mentioned in the sales agreement of the goods or other documents related to the sale. It would be considered an indication that the buyer could not buy the goods without payment of the royalties or licence fees if, for example, it is mentioned in the sales contract that the seller may cancel the sale of the goods in case the royalties or licence fees are not being paid (see example C below). 

The royalties must be included in the customs value if the buyer must pay them directly or indirectly as a condition of sale of the imported goods. However, the licensee does not necessarily have to be either the seller or the buyer of the goods (see example D below).

Royalties as Assists

A common situation arises whereby the licensor provides the licensee, either directly or indirectly, with drawings, designs, or instructions for manufacture of the goods, or computer programs for incorporation outside the UK in memory chips. The drawings are passed to the manufacturer so that they can produce the specified items. 

It is considered that the items in question are assists and their cost or value is to be included in the customs value of the imported goods unless the work involved was undertaken in the UK (see example E below).  Additionally, WCO case studies 8.1 and 8.2 provide examples of royalty or licence fees being treated as ‘assists’.  

See also WCO AO 4.1 to 4.17.

Calculation of the amount to be added to the price actually paid or payable as representing the royalty or licence fee

In general royalties and licence fees are calculated after importation of the goods to be valued. In such cases a percentage adjustment may be agreed with the importer based on results over a representative period and updated regularly (see Simplification section). When only a part of a royalty payment is deemed to be includible in the customs value, consultation between the importer and Customs is particularly desirable. The basis for apportionment of the total payment into dutiable and non-dutiable elements can sometimes be found in the licence agreement itself, when for example a 7% total royalty may be specified as representing 3% for patent rights, 2% for marketing know-how and 2% for trademark usage. More often than not, however, the basis for apportionment cannot be so found. The respective values for rights and know-how can at times be established by evaluating the extent to which know-how is transferred or availed of and deducting that sum from the total royalty paid or payable. Also, at the joint request of the importer and Customs the licensor may be prepared to indicate an appropriate apportionment based on their own calculations. Further inspection of correspondence between licensor and licensee, interoffice reports of negotiations which preceded the drawing up of the licence agreement or discussion with one of the negotiators of the licence agreement may provide the basis for apportionment when at first sight apportionment may not seem possible.

Exceptions

Royalties and licence fees are not to be added to the price actually paid or payable when they represent:  

• charges for the right to reproduce the imported goods in the UK
• payments made by the buyer for the right to distribute or resell the imported goods if such payments are not a condition of the sale for import to the UK of the goods  

In some cases, the addition to the price actually paid or payable is made under Regulation 112(1) CIDEER as an assist. In these cases, it is not necessary to consider the possible addition to the price actually paid or payable under the terms of Regulation 113  CIDEER (see example F below). 

See also case studies 8.1 and 8.2 of the WCO Customs Valuation Compendium concerning the application of Article 8(1)(b) and (c) of the Agreement.

Examples

Example A: Level of control does not equate to parties being related

Scenario

The imported goods incorporate logos and images protected by trademarks and copyrights in respect of which royalties and licence fees are paid.  

The parties involved are:  

• Company X, established in the US, who is the owner of the trademarks and copyrights (representations of comic strip characters) 
• Company Y, a UK subsidiary of Company  X, who is licensed to use the trademarks and copyrights in UK
• Company Z, also established in the UK, who is not related to Companies X and Y and is sublicensed by Company Y to use the protected images in question in the context of representation on a range of products (pens, notebooks) - Z is the buyer of the goods
• the manufacturers (and sellers) of the imported goods who are not related to X, Y or Z in the sense of Regulation 128 CIDEER

Royalty payments

Under the terms of the sub-licensing agreement, which is set out in a contract, royalty payments are made by Company Z to Company Y.

Manufacturing approval and production of the goods

The manufacturers are selected by the UK Company holding the sub-licence (Company Z). The manufacturers are quality approved by Company Y. A contract of quality approval is established between Company Y and the manufacturers, who sell the goods to Company Z.  

In particular, the licensor (Company Y) is entitled to carry out the following activities:  

• quality control of preliminary and final production models
• quality control of three-dimensional artistic designs fixed to or incorporated in the finished product
• approval of packaging and presentation
• approval of samples of finished goods
• approval of all changes to the finished product

The contract also provides for return to Company Y of models and other materials used to produce the finished goods which are in the possession of the producer or licensee (Company Z) at the end of the contract.

Additional information

Additional information to note includes:

• the range of goods (for example, pens, diaries) is not unique to the licensor (Company Y) and is specified by the buyer established in the UK (Company Z)
• the manufacturer is chosen by the buyer (Company Z)
• the manufacturer does not use a technology which is owned by the licensor (Company Y)
• the licensor (Company Y) does not intervene in the production operation
• the licensor (Company Y) only inspects the finished product (quantity, quality)

Importation

The third country manufacturers sell the goods to Company Z who imports the goods into the UK.

Flow of payments

In addition to payment for manufacture of the imported goods which Company Z makes to the manufacturer, Company Z also makes a royalty payment to Company Y.

Valuation treatment

In this case the royalties clearly relate to the goods being valued since the goods incorporate representations of the images or characters which are covered by licence and in respect of which royalties are paid.  

The activities, which the licensor is entitled to carry out, are to be considered only quality control checks. They do not confirm that the licensor controls the manufacturers; therefore, those parties are not related under Regulation 128  CIDEER. 

In this case the parties cannot be considered to be related. Because they are not related, the condition of sale element is not met. Therefore, it should be considered whether the payment is made to satisfy an obligation of the seller or whether the goods cannot be sold to or purchased by the buyer without payment of the royalties or licence fees.

Example B: Level of control does equate to related parties

Scenario

The imported goods incorporate the protected trademark ‘XY’ in respect of which royalties and licence fees are paid. The manufacturing of the imported goods requires the use of specific technology.  

The parties involved are:  

• Company A, established in the US, who is the owner of the trademark and the technology used in the manufacturing of the imported goods
• Company B, an UK subsidiary of Company A, who is licensed to use the trademark XY in the UK. B is the buyer of the imported goods
• Company C, established in Taiwan, who is the manufacturer (and seller) of the imported goods - C is not related to A or B, in the sense of Regulation 128  CIDEER, sells the goods to Company B who imports the goods into the UK

In addition to the payment to Company C for the imported goods, Company B makes a royalty payment to Company A.  

In accordance with the licence agreement and other contracts between the parties:  

• Company A designates the suppliers of the raw materials used in the production of the imported goods
• the product should only be manufactured for Company B or other Companies designated by Company A  
• without the express prior written consent of Company A, the manufacturer (or any affiliate or subsidiary) is not allowed to manufacture competitive products in any business relationship with any competitor of Company A
• the prices charged by the manufacturer will not be less favourable than prices charged for equivalent products to any other person for whom the manufacturer produces comparable products
• the manufacturer is only allowed to produce the exact quantity stipulated in the specific purchase order placed by Company B or the Companies designated by Company A. Production in excess of the amount ordered is expressly prohibited and shall be considered counterfeit
• the manufacturer is not allowed to manufacture or supply any products or goods using any confidential information or bearing any of the trademarks for any person other than Company B or other Companies designated by Company A
• Company A has the right to examine the manufacturer’s accounting records

Valuation treatment

The royalties are related to the goods being valued because specific technology is used, and the goods incorporate the protected trademark ‘XY’ in respect of which royalties are paid.  

The combination of the indicators described above, show that the licensor exercises at least indirect control over the manufacturer. These indicators go beyond quality control checks.   

Therefore, it has to be concluded that the licensor and the manufacturer/seller are related in the sense of Regulation 128 (2)  CIDEER consequently the royalty payments are to be included in the customs value. 

See WCO Explanatory Note (EN) 4.1 concerning the application of related parties for more information.  

Example C: Goods cannot be sold without payment of licence fee

Scenario

A manufacturer of garments in country X manufactures and sells jeans to buyer B in the UK. In addition to the sales contract with A, B engages himself in a licence agreement with company C, established in country Y, in order to be able to use a well-known trademark in the production and sale of the jeans. In the licence agreement between the licensor C and the licensee B it is established that production, sale, and importation of the jeans, produced according to the designs of the licence holder and incorporating the trademark in question, will be considered a breach of contract if the licence fee is not paid to the licensor C accordingly.

Valuation treatment

In this case the licence fee is related to the goods in question since the trademark is incorporated in the imported goods and the goods are resold in an unaltered state in the UK after importation. An examination of the licence agreement shows that a sale of the goods in question would be considered a breach of a contract without the licence fees being paid. In this case it can be concluded that the goods cannot be sold to, or purchased by B without payment of the licence fees and therefore the licence fees are to be included in the customs value of the imported jeans.

When the licence fee is paid to the seller of the imported goods or to a party related to the seller, the fee is considered to be paid as a condition of sale. However, there can be various situations where royalties are considered a condition of sale even when they are paid to a third party not related to the seller. Therefore, each situation must be analysed based on all the facts presented, including the sales and licence agreements, related documents, and relevant legal elements.

Example D: Goods cannot be sold without payment of licence fee

Scenario

A manufacturer of medicines in country X manufactures and sells painkillers to buyer B in the UK. The formula for the painkillers is protected with a patent by Csompany C in country Y. D, a parent Company of B has made a licence agreement with C according to which it can use subcontractors to produce the medicine. According to the licence agreement the members of the same group are allowed to import and sell the painkillers in the UK. In return D has to pay a licence fee to C on the total amount of painkillers produced. If the licence fee was not paid, production, importation and selling of the products would be considered a breach of the licence agreement.

Valuation treatment

In this case the licence fees are related to the imported goods since the painkillers have been produced according to the patented formula. D has paid a licence fee to C on the products imported by its subsidiary B. This can be considered an indirect payment by the buyer, since B and D belong to the same group of companies. If the licence fee was not paid, B could not buy, or A could not sell the imported goods without breaching the contractual arrangements between the companies. Licence fees paid by C for the imported products, therefore, have to be included in the customs value.

Example E: When a licence fee is considered an assist

Scenario

Buyer company A, based in the UK, contracts with a seller company B, in third country X to manufacture wedding dresses for import to the UK. Under a separate arrangement, company A contracts with company C based in third country Y, to undertake design work and produce designs for the dresses, which company A makes available to company B free of charge for use in their production.  

In addition to the price A pays to B for the finished dresses, under the arrangement with C, A is required to pay C a fee of £1,000 for each design produced and a licence fee of £1,000,000 per annum for the right to reproduce the designs in the manufacture of dresses.

Valuation treatment

In this case, although the annual payment is referred to as a licence fee, for customs valuation purposes, it falls to be considered under Regulation 112 CIDEER, rather than Regulation 113 CIDEER.  

The designs produced by C are provided free of charge by A to B for use in the production of the wedding dresses. They are, therefore, an assist covered in Regulation 112(2)(b) CIDEER, and, as the design work is undertaken outside the UK, its value should be included in the customs value.  

According to Regulation 112 (4)(a) CIDEER, where the buyer purchases any of the goods or services listed in Regulation 112  CIDEER, the value of the assist is the sales price. 

In this case, the total price C charges A for the designs and design work is the sum of the design fee and the licence fee, and this amount should be included in the customs value (apportioned to individual importations as appropriate) under Regulation 112(5) CIDEER, together with the total price A had to pay B for the finished dresses.

Example F: Royalty or licence fee not added to the customs value

Scenario

Company A makes greeting cards in the UK for sale within the UK. Company B, based in country Y, creates popular cartoons for children. Company A enters into license agreement with Company B whereby they pay Company B £10,000 for the rights to reproduce one of their popular cartoon characters on greeting cards and 5% of the profit from every card sold using the character. Company B provides Company A with physical drawings of the cartoon character that Company A can reproduce when producing their cards in the UK. The importation of the physical drawings from Company B, in Country Y, to Company A within the UK is the valuation consideration.

Valuation treatment

The amounts paid by Company A in respect of the rights to reproduce should not be taken into account in determining the customs value, provided that they are distinguished from the price paid or payable from the cost of the initial drawings provided by Company B as per Regulation 115(1)(C)  CIDEER.

Commissions

Buying commission

Buying commission is a payment made by an importer to a third party acting as a buying agent. Buying agents act for the interests of the buyer. They represent the buyer and help them find and purchase goods. Commissions are payments made to intermediaries for their participation in the conclusion of a contract of sale. 

In certain transactions a buying agent concludes the contract and re-invoices the importer, distinguishing between the price of the goods and the fees. The fact of re-invoicing does not make the agent the seller of the goods, nor can the fees be considered as part of the price of the goods. Providing ‘buying commissions’ are shown separately from the price of the goods on the documentation accompanying the import declaration or in the trading accounts of the importer, they are excludible from the customs value as per Regulation 115(1)(b) CIDEER. 

The agent or intermediary is a person who buys and sells goods, possibly in their own name but always for the account of a principal. If commission is shown on the agent’s invoice, it is necessary to check whether the agent is acting for the buyer or the seller of the goods (see also WCO EN2.1, Comm 17.1 and ECJ cases 11/89 and 299/90).

Selling Commission

Selling commission is a payment made to a third party acting as a selling agent. Selling agents act for the interest of the seller and help them to sell their goods. It is common for sellers to use selling agents. 

Where the seller pays the commission, it is usual for it to be included in the invoice price. If the buyer pays the commission, it is usually invoiced separately. If not already included in the invoice price, selling commission must be included in the customs value as per Regulation 111(1)(e) CIDEER. Under Method 4 selling commission is deductible but otherwise it is dutiable.

Examples

1. Imports to prior order  

These occur when a buyer has been found by the agent and the goods are imported to fulfil the order. As there is a sale at the time of importation, Method 1 is to be used; the transaction value being the price paid by the buyer including any commission earned by the agent. Invoices raised by either the agent, seller or supplier to the buyer are acceptable. The customs value is the invoice price plus any other additions to the price of the goods that are not included in the invoice price.

2. Imports as buffer stock 

These are made by agents in respect of long-term sales contracts. For example, a buyer may order a large quantity to be delivered over a period of time. As the goods relate to an existing sale, there is a price known at the time of importation and therefore, buffer stock is treated in the same way as prior order goods.

3. Imports as consignment stock 

These are made without a buyer, or a sale price being known at the time of importation. Once the goods are imported the agent attempts to find a buyer. The goods may be imported direct to free circulation or be placed in customs warehouse. For goods imported direct to free circulation, Method 1 cannot be used, as there is no sale or transaction. The goods have to be valued for customs purposes under another method, working through in order. 

For goods placed in a customs warehouse and subsequently removed to free circulation, Method 1 is to be considered where the goods are the subject of a sale in warehouse or ex-warehouse.

Brokerage fees

These are payments made to a third party acting as a broker. Brokers facilitate the sale of goods but do not take ownership of the goods. They do not represent the buyer or the seller over the other and usually charge both for arranging the sale. Brokerage is usually calculated as a percentage of the business concluded as a result of the broker’s activities. The small percentage the broker receives is a good indication of the broker’s rather limited responsibilities. 

Where the broker is paid by the supplier of the goods, the total brokerage will normally be included in the invoice price. In such cases there is no problem with regard to valuation. In cases where brokerage is not so included but paid separately by the buyer to the seller, it is to be added to the price paid or payable. 

The broker may be paid directly by the buyer, or each of the parties to the transaction may pay part of the brokerage. In these cases, the buyer’s share of the brokerage fee should be added to the price actually paid or payable in so far as it has not already been included in the invoice price and does not constitute ‘buying commission’. 

As per Regulation 111(1)(e) CIDEER it will be necessary to include in that value commissions and brokerage incurred by the buyer except buying commission. The question of whether or not payments made to intermediaries by the buyer should be added to the price paid or payable for the goods will depend on the final analysis of the role played by the intermediary and not on the term agent or broker by which they are known. 

Payments made in respect of commission or brokerage paid by the seller, but which are not charged to the buyer should not be added to the price paid or payable.

Discounts

A discount is a reduction in the sale price for goods or services allowed to certain customers, under certain circumstances and at certain times. It is given as a definite amount or as a percentage of the sale price. There are several types of discounts allowed when buying goods. To decide whether or not to allow a discount, a business should check if the discount has been agreed before the Customs declaration for the entry of the goods is accepted. A sale can only meet this definition if the arrangements governing it are complete before the import. Any discount given after import would be seen as a voluntary gift from the seller to the buyer. So, the Customs value would be based on the full, undiscounted price paid or payable at the time of the acceptance of the entry.

The most common types of discounts

Early settlement discounts

Cash or settlement discounts are normally granted for prompt payment within a specified period of time. In some cases, a discount may be granted for payment made before dispatch of the goods. Such discounts are normally shown on the invoice accompanying the goods and produced with the entry for free circulation. For cash or settlement discounts shown on invoices the following applies:

• the discount is accepted at the level declared if the payment reflecting this discount has been made at the time of entry to free circulation 
• if the payment has not been made at the time of entry to free circulation, an invoiced early payment discount which is valid at that moment can be accepted at the level declared provided it is a discount generally accepted within the trade sector concerned 
• if payment has been made at the undiscounted amount, the full price will form the basis of the customs value
• if several possibilities of early payments are granted according to the terms of payment  - for example, 5% for immediate payment, 3% for payment within 14 days, 2% for payment within one month the maximum discount may be accepted at the time of entry to free circulation

Distributor discounts

These are normally trade discounts. A distributor or concessionaire is usually not related to the seller but does have an agreement restricting the supplier from selling to anyone else in a given geographical area (see WCO EN 4.1 and case study 9.1). The supplier often aids the distributor or concessionaire by supplying advertising material, technical advice on marketing or allowing large discounts. Such arrangements, although they usually benefit both parties, do not prevent the transaction value between the seller and the distributor from being accepted under Method 1. Payments for sole distribution rights are usually covered by an agreement between the buyer and seller. Where the contractual arrangements indicate that such payments are made as a condition of the sale of the goods, they are to be included in the customs value.

Breakages and swells allowance

Some goods are likely to become damaged during transit, for example, cans swelling. In some trades it is normal practice to make an allowance for possible damage. Breakages are common so the allowances may be in the form of a percentage discount at the time of the sale rather than the buyer counting the exact number of damaged products in a consignment. The seller allows a discount in advance to account for any damage instead of adjusting later. The discount can be allowed as long as the discounted price is actually paid for the goods.

Reduced quantity or reduced quality discounts

Consignments of some types of goods are likely to include some faulty or poor-quality items. To account for these, the buyer may agree to a percentage discount rather than having to make adjustments later for the exact number of faulty goods.

Quantity discounts

Often, sellers offer quantity discounts to encourage buyers to purchase a large amount of goods. If the discount has been earned when the goods enter the UK, the discounted price is allowed.

Contingency discounts

Contingency discounts are a quantity discount earned by buying a large amount of goods over a period, rather than in a single consignment. Once enough goods have been bought to get the discount, the price of all the goods bought up to that point are also reduced. This usually means the buyer is then in credit with the seller. The discount credit can be claimed for each purchase leading to the discount but all of the discount cannot be applied to the final consignment of goods, even if the whole discount is given on that invoice. The importer can make a post import claim for the purchases affected by the discount. See WCO AO 15.1 and 8.1.

Samples discounts

It is normal for some trades to sell a few goods as samples. These are usually cheaper than the normal goods because of a samples discount. A reduction in price granted for these reasons is not considered to be a restriction which would prevent the use of Method 1.

While discounts are usually allowed, exceptions to this general rule include: 

• situations where the discount is given to take account of goods returned by the buyer to the seller in part exchange for the goods being imported
• where the discount relates to a previous purchase

Where the buyer and seller are related parties, a discount is allowable where it can be shown that it is given for good commercial reasons rather than because of the relationship.

Interpretation of ‘reasonable time period’

As per Regulation 118A CIDEER ‘within a reasonable time period’ of, or ending with, the importation (a) of the chargeable goods (b), means a period of time as close to that importation as possible which is reasonable in respect of the chargeable goods, as determined by an HMRC officer, taking into account factors including, but not limited to, commercial practices and market conditions affecting the price of goods of the same type as the chargeable goods. 

In practice this would normally be a period of around 90 days before or after importation to the UK. However, depending on the goods being imported HMRC retain discretion to reject and determine the time period used by the importer if HMRC believe it is not aligned with the appropriate commercial practices and market conditions. 

For example, an importer imports fruits which fluctuate in value over short-time periods depending on their availability. Therefore a ‘reasonable time period’ is likely to be significantly less than 90 days. Other examples may include seasonal merchandise and fuels.