Widget fight for MDF to reduce import duties fails

Evidence provided not sufficient to prove the case, says tax tribunal

Distributor Widget UK has lost a long-running battle to have marketing development funds recognised as a reduction in price for the purposes of paying duties on imported goods.

Widget had appealed to the first-tier tribunal of the Tax Chamber against original HMRC decisions in 2010 and 2011 – but the tribunal has validated HMRC's stance, according to court documents released on 13 February.

The Stevenage distributor had sought to have £40,258 in import duties paid on products imported from US manufacturer Pure Digital in 2009 recovered as a result of receiving marketing development funds (MDF) from that vendor. HMRC disagreed.

According to Judge Dr K Khan, presiding at the tribunal, the basis of Widget's claim was that the customs value originally paid in respect of flip-video camcorders purchased from Pure Digital and imported into the UK should take into account the amount of credit notes issued by Pure Digital, in respect of MDF payments.

"The core issue therefore is the MDF credit and the quantum of that credit. The appellant asserts that the amount claimed is 4.9 per cent of (total duties paid) £821.599 which is £40,258.35." he said.

"However, while the accrual of the marketing fund seems to be based on the number of goods purchased, the payments out of the marketing fund are not linked to the goods but rather to the occurrence of certain marketing activities.

"The tribunal cannot see how these payments constitute a price reduction in relation to the goods themselves."

The tribunal based its decision, he said, on the evidence provided by Widget and by HMRC, which involved a number of arguments.

While it was true that MDF credits did in effect reduce the transaction price, technically the MDF credits and the purchase of the goods could be understood as separate transactions. In the tribunal's view, Widget had not provided sufficient evidence to the contrary.

Mark Needham, chairman of Widget, was offered the opportunity to comment for this story but declined.

Needham gave oral evidence and provided a witness statement used by the tribunal in making its decision. According to the tribunal, his position was essentially that the "true or real" price should be the subject of customs duty, and should not include an amount for marketing.

In his evidence as cited by the tribunal, Needham indicated that while MDF is about the need for retailers to engage in marketing, in reality it is used differently.

"It would be used to provide credits to help him show the maintenance of retail price through rewards to compliant customers. Alternatively, it might be used to provide additional credits in relation to securing larger sales, particularly at quarter-end to ensure that sales targets were met by Widget. The use of the MDF was not the sole discretion of Widget," it said.

Pure Digital staff were also engaged in directing the use of the MDF, he said, which is a mechanism both for paying additional costs a retailer may add, and for controlling the price of imported goods.

MDF credit was held in Widget's account, but Pure Digital would give permission to dispose of the money, once retailers undertook "suitable marketing activities", the statement said.

"Although not detailed in the suppliers' invoice, the fact that it is a contractual claim at the material time means that a discount should be recognised in the customs valuation," according to Needham's evidence.

Widget referred to articles 29, 32 and 33 of the Customs Code Committee (CCC) and Article 148 of the Implementing Regulations (IR) to the CCC in making its submission.

However, according to HMRC, whose view was upheld by the tribunal, Widget would have needed to provide "evidence of a contractual entitlement or price reduction" based on the relevant clause in the purchase agreement.

This was required under Public Notice 252 Paragraph 30.3 which necessitates any claim for a price reduction to be "accompanied by appropriate evidence including full details of the contractual arrangements as well as rebates received from and issued by the seller."

Furthermore, HMRC maintained that article 148 of IR also says that the costs of marketing, even if performed as a buyer obligation following an agreement with the seller, are not to be considered when calculating the customs valuation.

In closing, Judge Khan said further appeals to the tribunal are allowed for 56 days after the parties received the decision.