Warranty, repairs and defective goods
Information about warranty, repairs and defective goods.
As per Regulation 114B CIDEER if an importer can prove to HMRC that damage occurred before the goods were released from customs into free circulation, customs values may be adjusted. If the customs value is to be adjusted this must lead to a regular financial settlement between buyer and seller, in a manner which establishes that the initial price of the goods has been adjusted in accordance with the relevant contract. This would exclude forms of indirect or postponed compensation for example payments to third parties, or free goods which cannot be regarded as acceptable forms of price adjustment.
If goods are proved to have been destroyed or damaged in a customs warehouse, apportionment of the total price between the destroyed or damaged goods and the remainder is allowable. This equally applies when sound goods are separated from goods that have been damaged or have deteriorated.
Depending on the evidence an importer can produce they can work out the customs value by:
- apportioning the original price paid or payable to take account of partial loss or damage
- using the revised price paid or payable where the seller reduces the price as a result of the loss or damage
- comparing the price at which the importer sells the damaged goods with the published average market values for the same type of goods at the time of sale and using the ratio to apportion the invoice price
There is no definition of defective within the TCTA and CIDEER. The defective state (and as appropriate the state of being non defective) of goods is determined by defined standards or criteria, and with reference to the relevant sales and warranty agreement. The importer has the obligation to demonstrate to HMRC that the imported goods were defective at the material time for valuation for customs purposes.
As per Regulation 114A CIDEER if goods are found to be defective at the time of acceptance of the Customs declaration for the free-circulation procedure, then an importer can submit a claim for repayment of duty to the Customs National Duty Repayments Centre if both the following apply:
- the defects are repaired
- the seller reimburses the importer under warranty for the cost of the warranty work carried out by them or on their behalf
Read Notices Made Under the Customs (Import Duty) (EU Exit) Regulations 2018 for more information.
Full details of the contractual arrangements covering the warranty work must be provided. The warranty work must have been agreed between the importer and the seller of the imported goods and contain concrete details of the warranty provisions. Details of the warranty provisions can also be set out in a separate document provided this is linked to the sales contract and both documents form part of the relevant commercial transaction between buyer and seller.
The importer must be able to show that the seller has accepted responsibility under the warranty for the defects of these goods. The seller must have also agreed to make reimbursement for the warranty work.
The importer must provide a clear audit trail. It must show that they’ve been reimbursed for the post-importation warranty work required on the imported goods which evidences and links:
- the discovery and nature of the defect, including sufficient details to identify the goods concerned
- the repair work undertaken and the cost
- the reimbursement of the repair cost by the seller in accordance with the terms of the warranty - if details are not available, demonstrate how the precise amount for the repair cost has been calculated and that the seller or warrantor has accepted liability for that amount
The importer must provide details of the customs entry for the goods in question.
The importer must calculate the amount of Customs Duty that would have been paid if the customs value of the imported goods had been reduced by the amount of the reimbursement they receive from the seller of the goods. Then they deduct this amount from the duty that was actually paid. Read Refunds and waivers on customs debt by HMRC for more information on claiming the difference.
An importer has 1 year from the date the customs declaration was accepted to submit their claim.
The importer must not claim more than the original declared value of the imported item.
HMRC reserve the right to carry out any appropriate verification enquiries and to request access to any relevant documentation before claims are processed.
It is not uncommon for the buyer to be supplied with goods that do not conform to the specification as set out in the contract between buyer and seller (WCO EN 3.1).
Such goods may be:
- goods which do not conform to quality standards specified in the contract or as represented by pre-production samples
- goods which have not been packed in accordance with the buyer’s requirements
- the wrong goods have been supplied, in terms of sizes and colours
In many cases the contract between buyer and seller will provide for adjustments to the originally agreed price designed to reflect the additional costs incurred by the buyer in putting right the non-conformity with the contractual specification for the goods, for example, the cost of minor repairs, additional unpacking, or repacking cost.
Example 1 - warranty repair
Scenario
Manufacturer A in a third country sells air fryers to an independent retailer B in the UK. Retailer B resells the air fryers to customers in the UK. There is a sales agreement between A and B, including provisions relating to warranties. Manufacturer A gives a 1-year repair warranty on all new air fryers, with the warranty being effective from the date of purchase. Under this sale and warranty arrangement any material or manufacturing faults found within a year of sale repaired by B will be compensated by means of an adjustment to the price initially paid to A.
Valuation treatment
When a UK customer discovers a fault with their goods they return the goods to B for repair. B rectifies any fault with the goods and returns them to the customer. B then makes a warranty claim to A, who checks the claim and where valid compensates B by making an adjustment to the price initially paid for the goods.
B as the importer of the defective goods makes a claim to HRMC for a refund of duty for the adjustment of the price within a period of 1 year following the date of acceptance of the declaration for entry to free circulation of the goods.
Example 2 - defective goods
Scenario
Importer A based in the UK purchases 1,000 embroidered cushions from Manufacturer B established in a third country. Importer A stipulates the terms and conditions which Manufacturer B agrees to be bound by. The terms and conditions, amongst others, relate to goods which are received with defects or not in accordance with the specification in the purchase order or contract. Under the contractual terms Manufacturer B is required to reimburse Importer A for the costs incurred in rectifying any defects and faults found on post importation examination of the goods. On post importation inspection of the cushions Importer A notices that 50 of them are defective in that they are missing a zip. Importer A rectifies the defective cushions and issues a debit note to Manufacturer B for the amount due for the repair of the cushions.
Valuation treatment
Based on the contractual arrangements Importer A issues a debit note to Manufacturer B. This is effectively a reduction in the price of goods which are found not to be in accordance with that specification as represented by the adjustment on the debit note. Importer A adjusts the value of the goods on the declaration by the value of the debit note resulting in a refund of the applicable duty. The price actually paid or payable for the goods is considered to be the net price, i.e. the original invoice price less the debit note amount. This applies as long as the adjustment on the debit note reflects only the degree of non-conformity with the specification, and no element of compensation for damages is involved.
Example 3 - warranty (recalls)
Scenario
Manufacturer M in a third country sells motor vehicles to an Importer D in the UK. There is a sales and distribution agreement between M and D. This agreement includes provisions relating to warranties. M gives a mileage warranty on all new vehicles. The warranty is effective from the date of registration of the vehicle.
Under this sale and warranty arrangement M accepts that where within a mileage of up to 80,000 miles, defects as a result of materials, manufacture or design faults are present, M is in breach of contract and will compensate D for making good the defects by means of an adjustment of the price initially paid.
Manufacturer M discovers that under certain operating conditions, components in the suspension system of certain vehicles may not perform reliably and this could pose risks relating with road worthiness. Consequently, M asks owners of the vehicles to return or recall them to the point of purchase for examination and possible adjustment as a precautionary measure. The situation is attributed to aspects of the design of the vehicles.
M and D have based the total price paid for the goods on the condition of the goods as guaranteed. Defects are to be established on the basis of the manufacturer’s specifications and technical norms set out in the warranty documentation. Contractual arrangements determining the sale of goods are provisions which specify that the goods are of a specific quality. This is a condition of the sale.
Valuation treatment
The need to review the vehicles and possibly to adjust or replace certain components is dependent on certain operating conditions to which the vehicles might be subject, the manufacturer authorises the carrying out of corrective measures as a precautionary step, the situation is attributed to aspects of the design of the vehicles.
However, the examination and possible adjustment as a precautionary measure does not establish a basis for application of an adjustment to the value as only actually defective vehicles can benefit from that provision.