The thought of calculating UK import duty and taxes fills many with dread, but it is not such a difficult task once you understand the basics.
Let’s take a look at how to do it, beginning by looking at what duties and taxes are.
Import duty and taxes – what are they?
Whenever goods are purchased outside of the EU, duty and tax has to be paid to the UK Customs department.
Note that goods travelling within the EU will not have VAT levied against them; normally VAT is only charged on the cost of the shipping or carriage.
Once this is done, your goods will be released to you. Nearly all shipments of this type are subject to UK Duty and VAT charges so whenever you are calculating the cost of importing goods from overseas, these two additional charges need to be taken into account. Now we will take a look at each of the two costs individually.
UK Duty
How much import duty you will pay will depend upon the value and type of goods being imported as every product has a different duty percentage rate. In order to calculate the percentage of duty payable you can ask your UK freight agent or work it out yourself using the online tariff from the UK government website . Much will depend on how the goods are classified and described so you will need a detailed description of the product and must take the time to allocate them to the correct tariff heading. Failure to get this right can result in costly fines and penalties. These tariff codes are often referred to as HS Codes.
How do HS Codes work?
Whenever any goods are imported to the UK, a customs harmonized tariff system code (HS code) needs to be used so that you can work out how much the percentage of duty will be. As the importer, you are legally bound to ensure that this is noted correctly. You will need a detailed description of the products to work out which category of tariff your goods fall into. With this in hand, you can calculate the correct UK duty and VAT.
VAT
As well as UK duty, you will have to pay VAT. Many people make the mistake of thinking that the VAT will be calculated only on the cost of the goods but this is wrong; VAT is calculated based upon the TOTAL cost of shipping the goods to the UK and is usually made up of the cost of the goods from the supplier together with the cost of shipping and duty. You are paying VAT on the total cost accrued when bringing the goods to the UK.
Calculating UK Duty and VAT
Here are a few simple examples to show you how to work out the costs of both UK duty and VAT.
Depending on how your parcels are shipping into the UK the duty and tax can be calculated using one of two methods.
1) CIF – Contract, Insurance and Freight
This considers the cost of shipping & insurance. This is the method that is most commonly used and will produce the higher costs of the two possible calculation methods.
Goods value: £5000 (purchased from outside of EU converted from USD to UK£)
Cost of Shipping/Insurance £500
Sub Total 1: £5500 (amount duty is calculated on)
Duty on Sub Total 1 @3.5%: £192.5
Sub Total 2: £5692.5
VAT @ 20% on Sub Total 2: £1138.5
TOTAL Landed cost including duty and VAT: £6831
So in this example, the total of UK duty and VAT (tax) payable to import these goods to the UK is £192.5 + £1138.5 which is £1331.
Here is a similar example created by our online calculator:
2) FOB – Free On Board
This calculation does not take into account the cost of insurance and freight when calculating duty & taxes.
Goods value: £5000 (purchased from outside of EU converted from USD to UK£)
Cost of Shipping/Insurance £500
Sub Total 1: £5000 (amount duty is calculated on)
Duty on Sub Total 1 @3.5%: £175
Sub Total 2: £5175
VAT @ 20% on Sub Total 2: £1035
TOTAL Landed cost including duty and VAT: £6710
So in this example, the total of UK duty and VAT (tax) payable to import these goods to the UK is £175 + £1035 which is £1210.
Here is a similar example created by our online calculator:
Paying your UK Duty and VAT tax
When you import your goods into the UK, the company that deals with your freight clearance will usually contact you to advise how much you need to pay. Most will send you an invoice and all you have to do is pay it so it is not at all complicated; all you need to do is nominate a freight agent in advance of the shipment arriving and then UK Customs will automatically contact them upon arrival. Your supplier overseas can also email you copies of the shipping invoices so that you can send ahead to your freight agent and pre-alert them of the imminent arrival.
If you are registered for VAT, you will have to pay the VAT but can claim it back when you do your VAT return using Certificate C79 which you should receive each month from HMRC.
Are your goods for resale or are they samples?
This makes a difference as if the goods are purely for sample purposes only and not to be sold on, duty and VAT relief may be given. They also have to be of negligible value and to be used for the purpose of obtaining orders for that same product. Products with a total commercial value (cost of goods, shipping cost, duty and insurance) above £15 normally are subject to VAT. If the total is above £135 then UK duty will likely have to be paid too.
If you are unsure as to where you stand, check this out with your UK freight agent or research on the HMRC website. Most of the time, if duty is not payable then VAT will be removed too.
How does the GSP Scheme work?
The GSP (Generalised System of Preferences) scheme allows for some products being imported from certain countries to be charged at a lower duty rate or even zero duty. This EU scheme was put in place to allow suppliers in developing countries to trade more easily throughout the world. If you fall into this scheme as in importer then your buying costs will be much lower, allowing you to either cut your selling prices to hold back competitors or increase margins.
How much duty you pay will depend on the country that is exporting to the UK. If your product supplier is covered by the GSP scheme, they will be able to provide you with a Form A (Certificate of Origin) stamped and signed; using this when the goods arrive in the UK will show customs that the goods fall into the GSP scheme and that the duty rate is lower or not applicable.