Today’s article is about something quite simple, but still hugely important – import duty and VAT on goods bought from outside the EU.
I receive countless emails every week from people asking me about import taxes; how much they are, when do they apply, how to calculate them etc.
And although once you start importing it becomes second nature and incredibly simple, it is something that can be off-putting initially and as a result; some people continue ordering from local wholesalers at much higher prices than they could get importing directly from places like China or the US.
So today I’m going to go over import taxes and give you a guide to use when importing goods to the UK from outside the EU.
First things first; what taxes do you have to pay on imported goods?
In general, you need to pay VAT (Value Added Tax) and import duty.
VAT is a set amount (currently 20%) whereas import duty varies depending on the type of product, with many being duty-free.
Import duty is calculated as a percentage of the customs value of the goods you are importing, which means:
- The price paid for the goods.
- The shipping cost.
- The insurance cost.
As mentioned above, the duty rate depends on the product type and many are actually duty free. I won’t list them all here but some popular duty free products include:
- Computer Software
- Desktop PCs
- Mobile Phones
- Video Game Consoles
So as you can see, a number of products actually have a ‘nil’ rate of duty, even when imported from outside the EU.
To find out the exact duty rate for a specific product, you need to know its HS (Harmonized System) Code, which is basically the universal code to categorise a product.
The simplest and easiest way to find the HS code for a product is by using this site:
And then VAT, which is currently a set 20%, is calculated as a percentage of the total customs value PLUS any duty paid.
But one other thing to bear in mind when importing are the minimum thresholds, below which duty/VAT is waived.
For business purchases, import duty is NOT charged if:
- The total order is worth £135 or less.
- The total amount of import duty due is less than £9.
And then for VAT – it is NOT charged for any import worth less than £15 with the exception of tobacco, alcohol and perfumes – for which VAT is always payable, regardless of the order amount.
So that’s it – those are the minimum thresholds for paying VAT and duty on orders from outside the EU – £135 for import duty and £15 for VAT.
But this only applies to business imports. If you are receiving gifts from outside the EU, the minimum thresholds are slightly different:
- For import duty for gifts, if the total value is less than £630, then a flat rate of 2.5% is paid.
- Anything above that value is charged at the normal rate of duty.
- For VAT for gifts, it is charged on anything above £36 in value.
Obviously we are really only concerned with business imports, but I just wanted to clarify the rules regarding gifts to make everything crystal clear.
And that brings me onto another important point…
Undervaluing Goods or Marking Them as Gifts
I’m sure you’ve all seen this 100s of times! In fact it’s so common that it has pretty much become regular practice for imports from China…
The order is either undervalued on the customs declarations form or it is marked as a gift (more common with small, personal orders on eBay etc.).
I hope you already know without me having to say that you should not do this under any circumstances, because:
This should be reason enough for everyone to avoid this practice – undervaluing goods in order to avoid VAT and import duty is ILLEGAL, as simple as that.
And no, the old claim of ‘I didn’t know it was being undervalued as my supplier did it without me asking’ is NOT a valid excuse! You, as the importer, are solely responsible for the items you are ordering and must ensure that all customs declaration forms are filled in correctly.
Another big problem with undervaluing imports is that it makes it impossible to properly book these orders and sales within your accounting.
When you’ve declared an order worth £130 when it was really worth £400, then what happens when you sell those items for £800? You’ve now created extra profit that doesn’t actual exist… ‘profit’ that you will then have to pay tax on… completely negating the benefit of undervaluing your order in the first place.
Basically; it will completely screw-up your accounts which WILL be a huge problem for you – particular as your business grows and you register as a Ltd company.
And that brings me onto the final reason for why you should never undervalue your orders –
It is the absolute WRONG mentality for creating a long-term, successful business.
If you’re relying on avoiding VAT and import duty to make some short-term profit, then your mentality is all wrong and, I’m sorry to say, you probably won’t create a successful business anyway.
If the product you’re looking at importing and selling isn’t profitable when you pay the correct taxes, then you should be looking for another product – not trying to figure out how to avoid paying those taxes!
Do things right from the beginning and you will continue that way!
I’m sorry if you feel I’m going on about this for too long, but it is so important that you don’t go down this route, particularly for new and first-time importers.
So please, always declare the correct amounts so that you can properly book your purchases and sales, and build a real business.
Now lastly for this guide, I want to do a quick example calculation for you so you can follow the same steps yourself.
For my example, let’s say I am ordering a set of high-end tennis rackets from the US, which I am importing to the UK.
Firstly, I need to calculate the customs value:
$1,000 (10x $100 rackets) + $150 (shipping cost) + $20 (insurance) =$1,170
IMPORTANT – I now need to convert this amount to GBP (British Pound) for tax purposes but this cannot just be estimated or taken from an online exchange site like xe.com, no – instead you are given the rate of exchange to use each month by HMRC, which you can find here: Exchange Rates 2014
So for my calculation, the $-£ exchange rate for August 2014 is 1.7042 which means my import is valued at £686.54 ($1,170/1.7042).
The third step is to calculate the import duty, which for tennis rackets from the US is 4.7%:
£686.54 x 4.7% = £32.27
Next is to calculate the VAT at 20%. And remember, this is paid on the total customs value (£686.64) PLUS the duty paid (£32.27), so:
£686.64 + £32.27 =
£718.91 x 20% = £143.78
That means all that’s left for me to do is add the import duty and VAT together to find out the total amount of import tax payable on this order, which is £176.05 – making my total landed cost for the 10 tennis rackets £862.59 (total product cost + all import taxes).
And that’s it! 5 simple steps to calculate the exact final cost for any import order.
And although it is important to understand how it works, you don’t actually have to worry about and calculate all the details yourself if you use a freight forwarder for your order (which is what I always recommend).
A freight forwarder takes care of EVERYTHING when you import, including shipping and customs so there’s really very little for you to do.
If you need a freight forwarder in the UK, my recommendation is Woodland Global – they have an impeccable reputation and cater equally to small and large businesses, with very reasonable pricing.
Also, if you’re sending small packages via courier companies – again, you don’t have to worry about this procedure as couriers will do the customs clearance procedure for you.
Still, its essential to learn how this process works so that you can calculate POTENTIAL taxes before you place any orders, so you know exactly how much goods will cost you when they’re delivered to you.
So that covers pretty much all I wanted to go over in this post – now all that’s left is for you to take action!
Use this guide along with my hugely popular posts on How to Import Products from China & How to Avoid Scammers and Find Trusted Suppliers on Alibaba to start your very own importing business.
I really have provided you with everything you need, so don’t procrastinate and make excuses, use what you’ve learnt and get started today!
I look forward to hearing your success stories soon!
All the best,