The Value For Customs Purposes

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Goods imported into the UK must be accurately valued for customs duty and import VAT purposes.

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The value for customs duty purposes is the CIF (Cost, Insurance & Freight) value in £-sterling/GBP, arrived at by applying one of the methods listed below (derived from the World Trade Organisation’s (WTO) Valuation Agreement), considered and applied in the sequence shown below:

• Valuation method 1 - the transaction value of the imported goods (the price paid or payable for these goods).  

• Valuation method 2 - the transaction value of identical goods (goods which are the same in all respects including physical characteristics, quality, and reputation).

• Valuation method 3 - the transaction value of similar goods (produced in the same country, which perform the same tasks and are commercially interchangeable).

• Value method 4 - the deductive method (the value derived from the selling price of the imported goods or identical or similar goods in the UK).

• Valuation method 5 - the computed value (the value based on the built-up cost of the imported goods).

• Valuation method 6 - the fall-back method (the value based on reasonable means consistent with accepted  valuation principles).

You can find important detail regarding the above methods here: Customs valuation - Guidance - GOV.UK .

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The primary basis for establishing the customs value of goods is the transaction value, that is, the price you actually paid or that was payable for the goods when they were sold for export to you for importation into the UK, with certain adjustments (additions / deductions as applicable). If you are unable to use this basis then you must obtain the value using the next most appropriate method (see above). You must base the customs value on the total payment made, or to be made, for the goods as a condition of sale.

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The value for import VAT purposes is the sum of the customs value and any duty payable, PLUS if not already included in the price, all incidental expenses such as commission, packing, transport, and insurance costs incurred up to the goods’ delivery destination in the UK: See Working out the VAT value using the customs value of the imported goods - GOV.UK.

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Where Do Royalties And Licence Fees Come In?

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A royalty or a licence fee can be regarded as a cost incurred associated with the use, manufacture and/or sale of a particular good. They can include payments for patents, design rights, copyrights, trademarks, processes, ‘know how’, technical knowledge, assistance, and/or for similar protected rights linked to the imported item.

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A royalty tends to be an ongoing, usage-based payment typically calculated as a percentage of sales or units. Whereas a licence fee tends to be a fixed flat payment granted for the authorisation to use intellectual property such as a design or trademark.

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For His Majesty’s Revenue & Customs (HMRC):

‘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)’.

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HMRC notes that relevant contracts around this and the number of parties involved can vary significantly Arrangements concerning royalties and licence fees are typically the subject of a separate contract or agreement.

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For customs valuation purposes, royalties and licence fees are among a number of additional cost elements for which the customs value (CIF) must be adjusted to take account of at import, as applicable, in accordance with internationally recognised valuation rules, having due regard for the particulars the transaction.

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Note that there is specific HMRC guidance on customs valuation where the parties to a transaction are related - see how to check if a person is related to the seller. ‍

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When to include royalties and licence fees in the customs value

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‘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’. (Source: HMRC Guidance, GOV.UK).

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You need to include royalties and licence fees payable by you as buyer / importer, whether directly or indirectly, in the customs value if each of the following conditions apply:

• they relate to the imported goods

• they are paid as a condition of the sale of those goods in the agreement between the buyer and seller for the import of the goods into the United Kingdom

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They are regarded as paid as a condition of sale when any of the following apply:

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

• the payment by the buyer is made to satisfy an obligation of the seller, in accordance with contractual obligations (see Regulation 113 CIDEER

• the goods cannot be sold to, or purchased by, the buyer without payment of the royalties or license fees to a licensor.

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‘The assigned right for which a royalty / licence fee 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

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You can also apportion payments between dutiable and non-dutiable elements after the goods are imported if they relate partly to:

• the imported goods

• other ingredients or components added

• services related to the goods

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The basis for the apportionment of the total payment can sometimes be found in the relevant agreement.

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Where apportionment is not possible because you do not have the relevant information, you cannot use Method 1.

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Therefore to work out the customs value you must try Method 2. ‍

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When to exclude royalties and licence fees in the customs value

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‘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.  

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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 ‘. (Source: HMRC Guidance, GOV.UK).

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Takeaways

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The global growth of international trade both in volume and intensity over recent decades, has increased the complexity of international supply-chains and the nature of the commercial transactions involved. An aspect of this is the way elements such as royalties and licence fees can impact the value of goods for customs purposes.

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Governments nationally and through their World Customs Organisation (WCO) are taking more of an interest in the intangibles (for example branding and trademarks) linked to the goods crossing their borders. This is partly driven by the need to bolster tax revenues and the belief that royalties and licence fees is an under accounted for area.

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You may be undervaluing or overvaluing certain of your import consignments for customs purposes. To address the risk here you should:

• Ensure that the finance / tax function within your company is alive to this customs issue and its associated risks (assessments for additional duty / tax, costs, penalties,  etc.).

• Ensure compliance with relevant HMRC requirements and regularly review these in relation to royalty and / or licence fee payments.

• Be aware of the contents of any royalty and /or licence fee contracts or agreements applicable to the goods imported by your company, and seek to ensure that these are informed by customs considerations.

• Note that royalty and licence fee payments can contain parts that are dutiable and parts that are not. Knowing which is which can ensure that you do not overpay on customs duty.

• Sample audit your customs declarations and consider making a voluntary disclosure to HMRC in respect of duty/tax that you may owe in relation to any un / under declared dutiable royalties and/or licence fees applicable. And consider a duty reclaim for any overpaid duty/tax.

• Consider seeking the support of a professional adviser such as BKR to help you navigate this customs area.

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How BKR Can Support

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At BKR we have a wealth of experience and expertise with which we can help you to review and analyse  the adjustments (additions / deductions, as applicable) you make for customs and import VAT valuation purposes in relation to your imported goods, including those around royalties and/or licence fees, to assist you in your compliance assurance.

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We can also help you to review, and where necessary improve, the quality of your customs administration in the light of any issues arising.

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In addition we can assist you by:  

• Using our special software ‘tool’ to audit and analyse your customs declaration data to enable any errors to be spotted and remedial action to be taken. Such as the amendment of incorrect declarations, or the making of voluntary disclosures. We provide you with opportunity to spot discrepancies before HMRC does.

• Reviewing the customs commodity codes you are using, the customs valuation calculations you are making, and applicable customs origin requirements, to provide you with an objective assessment as to their correctness.

• Supporting you in any customs duty reclaim you may be entitled to apply for, or any voluntary disclosure you may wish to make to HMRC.

• Working with you to review, and where necessary improve, your customs processes, procedures, and documentation to enable you to optimise your customs and trade operation in line with good practice.

• Providing tailored technical customs administration training for your business.