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HMRC internal manual

Guidance on the Audit of Customs Values

Method 1 (transaction value): price review clauses

In commercial practice some contracts may include a price review clause or the contractual arrangements may provide for an adjustment to the price. Initially the price is provisionally fixed. Final determination of the price payable is subject to certain factors which are set out in the provisions of the contract itself. (WCO Comm. 4.1 refers).

Cases arise in which the contract of sale is verbal or in which variation of a written contract is agreed verbally between the parties concerned. In principle such verbal contracts/variations are to be accepted providing both buyer and seller are prepared to furnish written confirmation or, in cases of doubt, sworn statements (affidavits).

This situation can occur in a variety of ways, for example:

Plant and capital equipment made specially to order

The goods are delivered some considerable time after the placing of the order. The contract specifies that the final price will be determined on the basis of an agreed formula. The formula recognises increases or decreases of elements such as cost of labour, raw materials, overhead costs and other inputs incurred in the production of the goods.

Goods delivered over a period of time

The quantity of goods ordered is manufactured and delivered over a period of time. As a result of contract specifications, the final price of the first unit is different from that of the last unit and all other units.

Goods are provisionally priced

The goods are provisionally priced, because, in accordance with the provisions of the sales contract, final settlement depends on examination or analysis at the time of delivery (for example: acidity level of vegetable oils, the metal content of ores or the clean content of wool). This would also apply where the contractual arrangements provide for the goods meeting a standard of quality stipulated by the buyer (for example, textiles/garments).

Contract provisions

The contract provides for a post end year adjustment or price reconciliation.

Transfer price

The provisions of a multi-national group’s transfer pricing policy statement determine the transfer price. The policy may stipulate that adjustments are to be made periodically to take account, for example, of standard cost variations; currency fluctuations or to safeguard the profit margin of a distribution or selling/marketing company within the group.