How is UK import duty and VAT calculated?

Duty and import VAT are often the biggest costs on an import after the goods themselves, yet many businesses don't know how they're worked out until the bill arrives. The calculation follows four steps. Once you understand them, you can estimate your landed cost before you place an order.

Step 1: find the commodity code

Every product has a commodity code, a 10-digit number for imports, based on the international Harmonised System. The code decides your duty rate, whether VAT is charged at the standard rate, and whether any licences, checks or extra duties apply. You can look codes up on the UK government's online Trade Tariff.

Classification is the step that most often goes wrong. Two similar-looking products can sit under codes with very different duty rates. If you're unsure, HMRC offers Advance Tariff Rulings, which give you a legally binding decision on the code for your product. Read more in our guide to commodity codes.

Step 2: work out the customs value

In the UK, duty is calculated on a CIF-type basis. The customs value is usually the transaction value (the price you paid for the goods) plus the costs of getting them to the UK border:

• The price of the goods on the commercial invoice
• Freight costs to the UK border (the sea freight on a container import)
• Insurance to the UK border
• Certain other costs if you paid them separately, such as packing, buying commission, royalties or licence fees linked to the goods, and tools or moulds you supplied to the manufacturer

Costs after the goods arrive in the UK, such as UK terminal handling and inland haulage, are not part of the customs value for duty. Your Incoterm affects which of these costs you pay directly, but not the basis of the calculation. Even if you buy FOB and pay the sea freight separately, that freight still goes into the customs value.

Step 3: apply the duty rate

The duty rate comes from the UK Global Tariff for your commodity code. Many rates sit between 0% and 12%, though some goods are higher. Three things can change the rate:

• Preferential rates under a trade agreement. Goods that qualify as originating in a country the UK has a trade agreement with, such as the EU, Vietnam, Turkey or India, can often come in at a reduced or zero rate. You must meet the rules of origin and hold valid proof of origin.
• Extra duties. Some goods from some countries carry anti-dumping or other trade remedy duties on top of the normal rate.
• Reliefs and special procedures. Inward processing, customs warehousing, returned goods relief and end-use relief can suspend or reduce duty in the right circumstances.

Step 4: calculate import VAT

Import VAT is charged at the same rate as VAT on the same goods sold in the UK, which is 20% for most goods. It is calculated on the customs value plus the duty, plus incidental costs such as transport, handling and insurance up to the first destination in the UK.

Worked example: goods from China

Worked example: claiming a preferential rate

Now take the same shipment, but sourced from Vietnam, where the UK–Vietnam trade agreement gives many goods a reduced or zero rate if they meet the rules of origin.

Paying duty and VAT

• Postponed VAT accounting (PVA): VAT-registered businesses can declare and recover import VAT on the same VAT return, instead of paying it at the border. For most importers this is a big cash-flow saving.
• Duty deferment account: lets you pay duty once a month by direct debit instead of per shipment. It usually needs a guarantee, though some businesses can get a waiver.
• Immediate payment: without either of these, duty and VAT must be paid before the goods are released, often through your customs agent or forwarder.

Common mistakes that cost money

• Leaving the freight cost out of the customs value, which leads to underpaid duty and possible penalties
• Using a supplier's export code without checking it against the UK tariff
• Claiming a preferential rate without valid proof of origin
• Forgetting about anti-dumping duties on goods such as some steel, aluminium and ceramic products
• Paying import VAT at the border when postponed VAT accounting was available

How we can help

We can estimate duty and VAT when we quote, check that your commodity codes and documents line up before the goods arrive, and lodge your customs entry in-house, promptly and before the goods arrive where possible. See also what documents you need to import into the UK.