A Quick Guide to Customs Valuation Methods to Determine the Value of Goods while Filing Customs Declarations

Introduction

Customs valuation is the process of determining the value of goods or commodities for Government taxation purposes.  The customs value serves as the foundation for the following activities:

• computing the customs duty, imposed as a percentage of the total worth of the products and is known as ‘ad valorem’ duty
• calculating the VAT on imported items
• compiling trade statistics and reports

The UK and the European Union use the internationally recognised notion of ‘customs value’ developed by the World Trade Organization (WTO).

There are six methods to determine the value of goods:

• Method 1: Transaction Value
• Method 2: Transaction Value of identical goods
• Method 3: Transaction Value of similar goods
• Method 4: Deductive Method
• Method 5: Computed Method
• Method 6: Fall-back Method

Method 1: Transaction Value

The transaction value method serves as the primary method for determining the value of goods in a transaction. Transaction value refers to the price paid or payable for the products sold for export to the UK. This principal way of determining transaction value accounts for approximately 90% of transactions in the UK.

The following conditions apply to employing the primary method:

• There are no restrictions on the buyer’s disposal or use of the products, except for some permitted limits.
• The sale or price is not dependent on conditions beyond the seller’s control.
• The seller will not benefit from the buyer’s later resale, disposition, or use of the items unless an appropriate adjustment is made.
• If there is a relationship between the buyer and the seller, the relationship does not affect the price.

When Customs Authorities have sufficient grounds to believe that the declared transaction value does not correspond to the justified amount payable, they will solicit additional information and supporting papers from the declarant. If the questions persist, the customs authorities may opt to reject the use of the transaction value method to ascertain the transaction’s worth and request to apply a secondary technique for valuing goods.

Traders must take into account the following elements while valuing the goods: 

• Charges incurred by the buyer which are not included in the price paid: commission, brokerage, and container costs.
• Royalties and licence fees associated with the products being valued
• Proceeds from the seller’s subsequent resale, disposition, or usage of the imported goods
• Transportation and other incidental charges up to the moment of entry into the UK’s customs territory.

The following elements should not include in the customs value of the products: 

• Transportation charges upon arrival into the UK’s customs territory
• Interest charges – Import tariffs and other taxes imposed as a result of the products’ import
• Charges for assembly or maintenance incurred after entry into the UK
• Purchase commissions
• Marketing and advertising cost
• Any post importation work, for example, construction work, assembling, or maintenance.

Method 2: Transaction Value of identical goods

This method is based on the accepted transaction value of identical products imported simultaneously or around the same time. Identical items are identical in every way, including physical appearance, quality, and reputation. They are both manufactured in the same country by the same manufacturer. Minor cosmetic variations are irrelevant. If the Method 2 goods manufacturer is not the manufacturer of the Method 1 goods, another manufacturer’s products can substitute for comparison.

Method 3: Transaction Value of similar goods

This method employs the approved transaction value of similar products imported at or near the same time. Similar items are equivalent in terms of component materials and attribute to the commodities being valued. The origin-country of the product should be the same as well. They must be interchangeable commercially. If the seller does not produce a similar item, you can substitute comparable goods manufactured by another company.

Method 4: Deductive Method

The customs value is determined using the unit price at which the imported items, or identical or similar goods, are sold in the UK to the highest aggregate quantity of unrelated buyers. Given that the starting point is the retail price in the country of importation, several reductions, primarily for costs incurred within the UK, are required to bring the retail price down to the applicable customs value.

Method 5: Computed Method

The customs value is calculated using the cost of production of the items being valued, plus a sum for profit and general expenses that are often reflected in sales of goods of the same class or kind from the country of exportation to importation.

• Cost of production equals the cost of materials and manufacturing
• Profitability and general operating expenditures
• Other costs ( Transport, loading-unloading and handling charges)

Method 6: Fall-back Method

You should consider the fall-back method when none of the prior methods is applicable. It is based on earlier approaches but with a considerable amount of flexibility. To the maximum extent feasible, a customs value derived using this procedure should be based on previously determined values.

Frequently Asked Questions (FAQs) related to customs valuation methods

Must I provide evidence to back up the Customs Duty value?

Yes.   You must present relevant documentation and information requested by HMRC regarding an importation. Additionally, you may be forced to allow officers to inspect and extract data from all pertinent documents.

What if I object to a customs decision?

Suppose you disagree with the decision made against you. In that case, you have two options: request a review by writing to the decision-maker, explaining why you disagree with their decision or appeal directly to the tribunal. 

What proof of the price paid or payable am I required to produce?

You can produce a copy of the seller’s invoice or another document in support of the payment. It includes any document used instead of an invoice, regardless of its format, insofar as: The document’s validity is unquestionable; the information contained in the document is sufficient to substantiate the particulars declared or the information required.

What happens if customs officials have reservations about the transaction’s value?

If HMRC has any reservations about whether the declared transaction value accurately represents the actual amount paid or payable, HMRC will request additional information from you. If those reservations persist, HMRC will advise you (in writing if you so choose) of the reasons for them before reaching a final determination about the claimed value’s acceptability. You will be afforded a reasonable amount of time to react. After that, we will make a final determination and notify you in writing.

What does it mean to be ‘related’ to the seller?

(1) For this Part, individuals A and B are connected in the following circumstances:

• A is an officer of B if B is a corporation
• A and B are active partners in the business
• A is an employee of B
• The same person controls both A and B’s businesses
• A owns a firm that B operates
• A and B own a business together
• A is a close member of the same family as B

What are SPVs? 

Certain fruits and vegetables may have their customs values evaluated using a “Simplified Procedure System” known as the SPV. The prices are discounted in various ways to arrive at an average sterling value per 100 kilogrammes net for each product covered by the plan.

What do you mean by ‘delivery costs’?

These include the following:

• transportation costs
• insurance premiums (including global or blanket policies)
• costs for loading and handling
• charges for containers (for example, when hired for transportation of the imported goods)
• Terminal charges (fees associated with the handling/storage of freight containers at container depots)
• any additional expenditures incurred in transporting the items from one location to another

What is a ‘place of introduction’?

• Sea: If the commodities are transported directly to the United Kingdom, the place of introduction is the port of entry.
• Air: The place of introduction is when the air traveller first crosses the UK border.
• Whether it’s by road, rail, or inland waterway: The place of introduction is when goods pass through a customs office for the first time; this is usually when commodities enter the UK border.
• Post: The site of introduction is the delivery address, which could be your business or house.

What is a valuation declaration, and when is it required?

When Method 1 is employed, it is a form that provides information about the value declared on the import entry. HMRC ask you to complete a form for import declarations at the time of performing a post importation audit.

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Note: Please note that this article is correct to the best of our understanding as of the date of publication.