Happy Monday everyone! I hope you enjoyed your weekend.
I apologise, as I know this is probably the last thing you want to hear on a Monday morning, but today I want to talk about taxes – specifically the import and VAT that we, as importers, need to pay on goods bought from outside the EU (i.e. from China, USA, India etc.).
And actually it’s this dislike and general avoidance of the subject that has led me to write this post… as I recently received an email from someone distraught about an order they’ve placed because of the VAT and import duty.
Initially they had expected to make a healthy profit reselling the product on eBay, but they had miscalculated the import taxes! That goes completely against one of my main rules when importing – always do all of your calculations BEFORE placing an order, so that you know exactly what it’s going to cost you and how much profit you stand to make.
So today I want to share a simple and straightforward guide to calculating import taxes. Without further ado, let’s get to it!
First of all, exactly what taxes do you have to pay on goods imported from outside the EU?
And yes, this only refers to goods bought from countries outside the EU as imports within the European Union are import duty free. Just so that it’s 100% clear, the EU countries are:
Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
But when we discuss imports, 90% of the time it’s referring to China, and that obviously means there are import taxes to be paid, which are – VAT (value added tax) and import duty.
VAT is a set amount, currently 20%, whereas import duty ranges from 0% (duty-free) to 15%, depending on the product.
The exact amount is calculated using the product’s tariff code, which is a special number assigned to specific products. And by specific products I don’t mean – doll, clothes etc. I mean really specific, i.e. pyjamas of knitted cotton for boys under 14.
But that doesn’t mean you have to use an estimate for import duty, not at all! You can find out exactly how much import duty is due for the product you’re looking at simply by using DutyCalculator.com
- Where you’re importing from – I selected China
- Where you’re importing to – this would be UK, or wherever else you’re based
- The type of product – you can either enter a description and see what’s suggested or find the product by going down category levels
- The product value – i.e. the cost of the items you’re importing
- The shipping cost
- The insurance cost
The reason you need to enter the cost for shipping and insurance is because import duty is calculated on the total customs value, or CIF (cost, insurance and freight), which means:
- The price paid for the goods &
- The total shipping cost (including insurance).
Alright, back to dutycalculator.com and here is my completed search form:
Next I click “calculate import duty and taxes” to get my results. And here’s what comes up:
As you can see, everything has been worked out perfectly for me! I’m given my total customs value of £2,400, I’m given the amounts I need to pay for both import duty and VAT separately, as well as the total amount of import taxes due, and my final landed cost.
And at the bottom, under “calculation and compliance notes”, I can find out exactly what rate was used for the calculation. In this case the product was VAT exempt (quite rare) and had an import duty rate of 12%.
Let’s quickly do another test search, this time for a plastic mug (yes, I may be referring to our old favourite the lens mug, for those of you who have been reading my blog for a while now!):
And here are the results:
This product had more typical import taxes, with VAT at 20% and import duty at 6.5%.
BUT while dutycalculator.com is a terrific site, and one that I recommend to many of my readers, I still really believe that you need to be able to understand and calculate import taxes for yourself!
To help you understand why, I want to quickly go back to the person I mentioned at the beginning of this post, who had miscalculated the import taxes on their order. And yes, the person in question (who I’ll now refer to as Bob, to keep things simple) is more than happy for me to share his story to try and help others avoid the same mistake.
Bob was ordering 200 units of a product for £8 each, with £400 on top for shipping and insurance.
Following the advice on my blog, he had also calculated the amount he expected to get after eBay and PayPal fees, which was as follows:
eBay Selling Price – £20 with Free Shipping
- eBay Fees – 9% = £1.80
- PayPal Fees – 3.4% + £0.20 = £0.88
- Shipping – RM 2nd Class Small Parcel = £2.80
Nett Selling Price – £14.52
Then, going back to the quote he received from his supplier, Bob then worked out his final landed cost, and this is where he made his big mistakes!
Firstly, he only used the value of the goods, not including freight and insurance, and secondly, he used a rough figure of 25% for VAT and import duty.
As a result his final calculation looked something like this:
- £8 x 200 items = £1,600
- £1,600 x 1.25 (25%) = £2,000
- £2,000 + £400 (shipping) = £2,400
So a total landed cost of £2,400 or £12 per item.
With a nett selling price of £14.52, that gave £2.52 nett profit per item and a respectable ROI of 21%. Not bad for a first time order…
BUT, let’s redo the calculations the right way and see what difference that makes.
I’m going to do this step by step, so that you can apply the exact same method for your own orders.
Step 1 – Calculate the total customs value (product, shipping and insurance) of your order.
In this example that is £2,000.
Step 2 – Calculate the import duty.
This was actually 15%, and not 5% as had been estimated. That means £300 in import duty to be paid – £2,000 x 15% = £300
Step 3 – Calculate the VAT.
*IMPORTANT* VAT is paid on the total customs value PLUS the import duty paid.
So that means £2,300 x 20% = £460 VAT.
Step 4 – Add the total amount of import tax to your order amount to get your final landed cost.
£2,000 (order amount, including shipping) + £300 (import duty) + £460 (VAT) = £2,760
And just like that the profit per item dropped from £2.52 to a measly £0.72 and from an ROI of over 20% to just above 5%! A 4x difference in profit, all from miscalculating the import taxes.
I hope you can now appreciate why I always stress doing exact calculations BEFORE you place an order, as afterwards it’s too late to change anything! Really there’s no excuse not to get this done, when you have sites like dutycalculator.com to do all the work for you.
If for whatever reason you can’t/don’t want to use that site, then that’s fine – you can go straight to the source and find out the tariff codes for any product using the Trade Tariff tool here.
Or better yet, if you’re using a freight forwarder for your shipment, speak to them! You’d be surprised at just how knowledgeable a good freight forwarder is on all things import related. In fact I’ve actually saved a lot of money over the years following the advice of mine. I’m talking about simple things like using a different material for your product or adding something to the package that actually reduces the import duty due.
However you decide to go about it, please always make sure that you do full calculations for every order you place – otherwise you can get a nasty surprise when your goods arrive and it’s time to pay the bill!
And that’s about it for today’s post. My apologies to those of you who didn’t want to think about taxes on a Monday, but I hope this has prompted at least a few people in the midst of an order to stop and calculate things carefully.
If so, then I’ve done my job! 🙂
Until next time.
All the best,