Method 4 - Deductive method
Information about method 4, deduction method.
Method 4 is the fourth Method an importer can try when valuing goods for import into the UK. It is based on the selling price of the goods in the UK as laid out in Regulation 123 CIDEER and Regulation 124 CIDEER. Method 5 can be tried before Method 4 if an importer wishes as per Regulation 108 CIDEER.
Unit price
The unit price used to determine the customs value is the price at which the imported goods or imported identical or similar goods are sold in the UK, in the condition as imported, at the time of, or within a reasonable time period of, the importation of the chargeable goods into the United Kingdom.
Thus, there is no prohibition on taking into consideration sales of identical or similar goods imported by importers other than the importer of the goods to be valued. Nevertheless, in practice, it will be difficult to access details of sales other than those made by the importer in question.
If the unit price, of the goods being valued as sold in the UK, is known at the time of, or within a reasonable time period of, the importation of the chargeable goods into the United Kingdom; this value takes precedent over the unit price at which identical or similar goods are so sold.
The term ‘within a reasonable time period’ is interpreted in Regulation 118A CIDEER. Ideally sales should have taken place as close as possible to the date of entry to free circulation of the goods to be valued. The scope for flexibility will depend on market conditions and sudden fluctuations in price.
The unit price must also be based on the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place. Thus, sales to related parties are to be disregarded. In addition, where for example there are sales to retailers and wholesalers, it is the sales to wholesalers which are to be taken into consideration.
Any sales to a person, who supplies ‘assists’, are also to be disregarded.
The importer must be able to produce details of the sales in the greatest aggregate quantity at the time of entry into free circulation. If there is no sale at the time of, or within a reasonable time period of, the importation of the chargeable goods into the United Kingdom; the importer can base the customs value on the unit price of the actual sales of the imported goods that take place up to 90 days after importation to the UK. If the importer cannot establish the customs value until the goods have been sold, they must request release against a deposit. This is further outlined in Notices made under The Customs (Import Duty) (EU Exit) Regulations 2018.
If the goods are not sold in the UK in the condition as imported, the customs value can be based on the price at which the goods are sold after processing. But the importer cannot do this if the goods:
- lose their identity (unless they can accurately and easily establish the value added by the processing)
- keep their identity but form a minor part of the goods sold
If there are no sales to unrelated persons in the UK, this rules out Method 4. Method 5 must be tried if not already considered.
In order to arrive at the sale in the greatest aggregate quantity, the importer can add together the number of items sold at each price. The largest number of items sold at one price is the greatest aggregate quantity. The importer must deduct the following:
- either the commissions usually paid or agreed to be paid or the addition usually made for profit and general expenses in connection with sales in the UK of imported goods of the same class or kind
- the usual costs of transport, insurance and associated costs incurred in the UK
- UK customs duties and internal taxes
If the goods are sold after processing, the value added by the processing carried out in the UK must be deducted. The actual profit and general expenses can be deducted unless the figures are out of line with those usual for sales in the UK of imported goods of the same class or kind. The importer should have available information to show that the deduction that has been made is ‘usual’ by comparison with importers within the trade sector.
The term ‘goods of the same class or kind’ means goods which fall within a group or range of goods produced by a particular industry or sector of industry. It includes identical and similar goods. The goods need not have been imported from the same country as the goods being valued.
Evidence required
The importer must produce with the import entry one of the following showing the unit price in the greatest aggregate quantity:
- a sales invoice
- a price list current at the time of importation
- other evidence as agreed with HMRC
In the fresh fruit and vegetable and cut flowers trade, the account sales procedure may be used as a basis for arriving at the duty payable.
The importer must give a reasonable estimate of the final sales value for deposit purposes. This estimate must be supported by a pro-forma invoice, statement of value or other evidence.
For importations of fresh fruit and vegetables and cut flowers, the importer does not have to wait until all the goods are sold to establish the Customs value. Once the importer has sold enough to arrive at the unit price, they must send copies of the sales invoices and a copy of the calculations to the National Import Duty Adjustment Centre (NIDAC). Unless an overall percentage deduction has been agreed with HMRC, details of the actual deductions claimed will be required. Duty will either be taken to account, refunded, or called for.
Usual deductions
The meaning of this term has not been defined in the law. However, for administrative purposes, it is to be taken to mean consistent with the normal range of margins for profit and general expenses of unrelated importers trading in imported goods of the same class or kind, as those to be valued, and at the same commercial level as that at which the importer is operating. However, in order for a range to be acceptable, it should be neither too wide nor too deficient in population. The range should be obvious and easily discernible in order for it to be the ‘usual’ amount. Other approaches might also be possible (for example, the use of a greater amount (where such an amount exists) or an amount derived by simple or weighted averaging).
Profit and general expenses
Profit and general expenses should be taken as a whole.
Goods of the same class or kind
This indicates that whether goods are of the same class or kind as other goods must be determined on a case-by-case basis by reference to the circumstances involved. Sales in the UK of the narrowest group or range of imported goods of the same class or kind, which includes the goods being valued, for which the necessary information can be provided, should be examined. This term includes goods imported from the same country as the goods being valued as well as goods imported from other countries.
Commission
Commission is paid by overseas suppliers and exporters to their agents (selling or consignment agents or commissionaires) in the UK. Where the commission payment includes reimbursement for all the costs and expenses allowable under Method 4 the full amount is deductible as ‘profit and general expenses’. Where commission is paid separately from the reimbursement of costs and expenses, both amounts are deductible. The commission represents the profit element.
Allowable deductions
Deductions are allowed in respect of post-importation (but pre-sale) costs and expenses. This is on the proviso that they are consistent with those usually incurred by buyers running an established business selling imported goods similar to those being valued. In particular, this includes expenses relating to the cost of storing and preserving the goods prior to sale, preparing them for market and other expenses incidental to the marketing of the goods, including administration.
Non-allowable expenses
Non-allowable expenses include:
- those arising in the setting up of a business or in exceptional litigation
- cost of materials used or of process performed in the manufacture and packing of the goods outside the UK
- royalties and licence fees paid in respect of the manufacture of goods before importation
- post-sale expenses properly charged against gross profits such as income tax (and other direct taxation), write off of capital and goodwill, expense of financing loans (other than interest paid to finance the purchase of the imported goods to be valued), investments, losses by speculation (for example, on rates of exchange) and sums placed to reserve
- gains or losses resulting from the fluctuation of exchange rates
Expenses
Allowable only within certain usual limits. These include:
- depreciation of equipment (for example, machinery, tools, cars or furniture) which is allowable only insofar as it is appropriate to the period in question and relates to equipment used in the country of importation
- depreciation of buildings used for the purpose of a business which should be limited to the average annual cost of upkeep
- bad debts which are allowable within the limit of actual losses averaged over a period of years but should exclude any particularly heavy loss which is clearly abnormal
Import duties and other charges
The term ‘other charges’ includes anti-dumping or countervailing duties or levies payable in the UK. This is the last item to be deducted.
Trading accounts
The deductions for profit and general expenses should be derived from the importer’s accounts. By the exclusion of unusual, abnormal or non-recurring expenses, the balance remaining should reflect a consistent figure. Where possible and practical, more than one year’s accounts should be considered to arrive at an average.
Trading accounts are only of use if they reflect the overall financial situation relating to the imported goods. If the importer deals with different goods (for example, Method 1 importations or UK produced), then consideration should be given as to whether Method 4 is workable. Figures which do not accurately reflect the situation for the imported goods should not be used.
Deductions for profit should be the net profit before tax. The amount to be allowed is that actually achieved unless it is substantially higher than the usual for the particular trade and commercial level. In such cases, the allowance for profit should be limited to a reasonable amount for the importer’s post-importation pre-sale activities only.
In cases where the importer makes little or no profit (for example where a business is being established), then no allowance should be made for notional profit which does not exist.
It is accepted that there are practical difficulties in applying the deductive method. Particular problems arise where:
- an importer imports a wide range of products for sale in the UK to unrelated customers in different quantities and at varying prices
- the importer’s business covers a wide range of activities in addition to importing and selling the goods to be valued
- the goods to be valued are not sold in the same state but are subject to major processing after importation
- market conditions are particularly volatile
Case study - usual profit and general expenses
Scenario
Goods are imported and it is established that they are sold to unrelated buyers at various prices depending on quantity purchased. Sales are made at £85, £90 and £95 at a ratio of 10:8:7. The greatest aggregate quantity selling price is therefore £85.
Following examination of the trading accounts, it is agreed with the importer that the profit and general expenses element is 15% of the total sales figures. This figure is in line with the norm for the particular trade.
Calculations
From this information, the percentage deduction appropriate to the unit price may be calculated.
10 units sold at £85 = 850
8 units sold at £90 = 720
7 units sold at £95 = 665
Total units sold = 25
Deduction of 15% for usual profit and general expenses = 335.25
Net duty inclusive customs value of one item = £2,235 - 335.25/25 = £75.99
The difference between the net duty inclusive customs value of £75.99 and the unit price of £85 is £9.01; and this represents 10.6% of the unit price in the greatest aggregate quantity.
Conclusion
The allowable deduction in respect of the usual profit and general expenses from the unit price in the greatest aggregate quantity is therefore 10.6%.
For whole fruit and vegetables importer’s may, in the absence of a transaction value, use the values supplied under the simplified procedure value scheme. Goods must meet the description, commodity code, and criteria set out in the scheme. Simplified procedure value rates change every 14 days. Read Check simplified procedure value rates for fresh fruit and vegetables UK Integrated Online Tariff: Look up commodity codes, duty and VAT rates for more information on products and rates.