Following the updated guidance by HMRC and further information received in February 2023, we are running this focused clinic on why HMRC are saying that a Transfer Price agreement cannot be used as evidence in supporting an import customs value when bringing in goods from related parties.

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The purpose of this guidance is to ensure that a true customs value is declared on the UK import entries that meets the regulations which come from the WTO Valuation Agreement, as laid down in the UK Customs (Import Duty) (EU Exit) Regulations 2018 (CIDEER). 

Many large organizations have Transfer Price Agreements in place, but as these are created for corporate tax issues, they may not cover all the elements legally required in a customs value. Customs Valuation works on strict legal regulations moving from Method 1, the transaction price, to Method 6. HMRC have said that the majority of inter-company transactions using Transfer Price Agreements do not meet Method 1 rules.   

The law relating to establishing a true customs value states that arbitrary pricing is unacceptable, and neither is pricing requiring annual adjustments. 

With CDS now requiring a full declaration of the relationship between buyer and seller, when Method 1 is used, it is easier for HMRC to check what is being declared. It is your responsibility to find out more and check what you are currently doing against customs law. Join us, as we explore the practicalities of this more precise position from HMRC. 

OECD guidelines on establishing a transfer price are said to have no legal or direct relationship with customs valuation.   

So, if you rely on an inter-company Transfer Price Agreement to establish your customs value, you need to revisit this. It is all about knowing if the price declared for imported goods has been influenced by the parties’ relationship and adjusting that value accordingly to align it with the valuation law. 

Firstly, check if there is any evidence that you are pricing inter-company transactions on an ‘arm’s length’ basis - meaning you have evidence that the company sells to unrelated entities in the UK at the same price. 

If you cannot confirm this, you need to know which OECD method is used to establish the transfer price (TP), e.g., Cost Plus, Profit Split, TNMM, etc. This is because some TP methods may be helpful in considering secondary methods and arriving at an acceptable customs value under customs law. 

Additionally, check whether only one TP method is used across all inter-company Transfer Price Agreements and what costing elements are included within the transfer price. This will give you an idea of how close it is to the requirements of an import customs value and will clarify the following steps required to bridge any gaps. 

However, HMRC is saying they will not look at your transfer price agreements when asking for evidence to support the customs value declared; they want you to be able to provide an evidence-based price using one of the 6 Valuation Methods. 

To quote from the guidance: “the use of a transfer pricing study for examining the circumstances surrounding the sale must be considered on a case-by-case basis.” 

On 15th March 2023, HMRC published a policy paper on the introduction of Advanced Valuation Rulings (AVRs), which you can read here. This may be something companies using Transfer Price Agreements may want to consider using in the future. 

Finally, also be aware that from 1st April 2023, new powers have been built into UK legislation. Mainly, the Finance Act 1998 and the Taxes Management Act 1970, to specify certain transfer pricing records, which must be kept and preserved in the UK.