To try and reduce the national deficit HMRC are seeking to raise revenue wherever they can.  One increasing area of focus is whether royalties or licence fees (referred to in the rest of this article as “royalties”) paid to a brand owner in respect of the use of trade marks should be added to the purchase price of imported goods bearing such trade marks when calculating the value for Customs’ purposes.

Typically fashion licence arrangements will involve the following:

  • The licensee acquires the relevant trade marked pieces from an independent third party manufacturer unrelated to the brand owner.
  • The brand owner will have certain approval, anti-counterfeiting,  and quality control rights in respect of third party manufacturers.  This is in order to ensure the integrity of the manufactured products and the relevant trade marks.  
  • In particular, the brand owner may retain the right to deny authorisation for use of factories based upon, for example, their non-compliance with codes of conduct relating to child labour an unsafe working conditions and to audit production facilities.  
  • The brand owner may also pre-approve the use of certain third party manufacturers, although this does not require the licensee to use any of these manufacturers.
  • The licensee pays royalties to the brand owner.

Recently HMRC have sought to argue that royalties paid to the brand owner should be added to the customs value of the imported pieces acquired by the licensee from the third party manufacturers.  

Broadly, under the Community Customs Code (the “Code”), royalties will be added to the purchase price of the imported goods being valued where the payment of such royalties must be paid by the purchaser of the goods to the seller as a condition of sale of the goods.  The aim is to prevent arrangements intended to avoid customs duty by the price of the imported goods being reduced below the amount that would otherwise have been payable, with the deficiency in price being made up through the payment of increased royalties to the brand owner.  

The Code makes it clear that royalties paid to a third party will only be added to the customs value if:

(i)the seller of the goods (or a person related to him) requires the purchaser to make the royalty payment;  and/or 
(ii)the purchaser of the goods is not free to obtain such good from other suppliers unrelated to the seller.

In the typical scenario set out above, neither condition (i) nor condition (ii) will be satisfied.  The sellers of the goods (being the relevant third party manufacturers) are unrelated to the brand owner and do not require the payment of the royalty as a condition of selling the goods to the licensee, and the licensee is free to obtain the products from whichever third party manufacturer it chooses (provided the approval procedures are satisfied in respect of that manufacturer).

With well documented arrangements it should be possible to deal fairly swiftly with any HMRC arguments that royalties should be added to the customs value.  Such documents should make clear, for example, the independence of the third party manufacturers from the brand owner. 

Where, however, the arrangements are not well documented, HMRC will have the opportunity to apply pressure.

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