← Back to blog

Customs & Duties

When goods arrive into the UK from overseas, businesses often receive an invoice from their freight forwarder that bundles together several charges — and it's not always obvious what each line represents. Customs duty and import VAT are the two government charges, and while they are both calculated based on the value of the goods, they work very differently and have entirely different implications for your business.

What Customs Duty Is

Customs duty is a trade tariff — a tax applied to goods imported from other countries, set by the UK government as part of its trade policy. The rate depends on two things: what the goods are (determined by the commodity code) and where they come from (the country of origin). The rates are published in the UK Global Tariff and range from zero for many industrial products to 12% or more for clothing and some agricultural goods.

Customs duty is calculated on the customs value of the goods — the CIF value, meaning the cost of the goods plus insurance and freight to the UK border. It is a permanent cost; there is no mechanism for VAT-registered businesses to reclaim it. Whatever duty you pay, you pay — it simply increases your cost of goods.

Duty rates can be reduced or eliminated if the goods qualify for a preferential rate under a UK trade agreement. The UK has agreements with over 70 countries, and if the goods meet the relevant rules of origin, you may pay a lower rate or nothing at all.

What Import VAT Is

Import VAT is not a trade measure — it is the same Value Added Tax that applies to all goods and services consumed in the UK, applied at the border to level the playing field between imported goods and UK-produced goods. A UK manufacturer charges VAT on their products; without import VAT, overseas competitors' goods would reach the UK market without bearing that same tax.

The rate is the standard UK VAT rate — currently 20% for most goods (with reduced rates applying to certain categories such as children's car seats and domestic fuel).

Crucially, for VAT-registered businesses, import VAT is reclaimable as input tax on the VAT return, in the same way as domestic VAT on purchases. This means it is cash-flow neutral in the long run — you pay it upfront but get it back later. For non-VAT-registered businesses (those below the £90,000 registration threshold), import VAT is a genuine, non-recoverable cost.

How They Are Calculated Differently

This is where many people get confused. Duty and import VAT are not both calculated on the same base.

Customs duty is calculated on the customs value: the cost of goods + insurance + freight to the UK border (CIF value).

Import VAT is calculated on the customs value plus the duty itself. In other words, you pay VAT on the duty you've already paid. This is sometimes called the "VAT base" for imports.

The formula is:

• Customs value (CIF) = cost of goods + insurance + freight
• Customs duty = customs value × duty rate
• VAT base = customs value + customs duty
• Import VAT = VAT base × VAT rate (20%)

Worked Example

Let's say you import clothing from India. The goods cost £2,000, with £150 freight and £30 insurance. The applicable duty rate under the UK Global Tariff is 12%.

• Customs value: £2,000 + £150 + £30 = £2,180
• Customs duty: £2,180 × 12% = £261.60
• VAT base: £2,180 + £261.60 = £2,441.60
• Import VAT: £2,441.60 × 20% = £488.32
• Total border charges: £261.60 + £488.32 = £749.92

For a VAT-registered business, the £488.32 import VAT is reclaimable — leaving the real cost as £261.60 in duty plus the original £2,180 in goods and freight. For a non-registered business, both the duty and the VAT are costs.

The £135 Threshold

For consignments valued at £135 or less, the rules change. No customs duty applies (subject to this threshold applying per consignment, not per item). Import VAT is not charged at the border either — instead, the overseas seller is required to register for UK VAT and charge it at the point of sale. This shifts the responsibility from the importer to the exporter, and from the border to the checkout.

Postponed VAT Accounting

If you are VAT registered and import regularly, you should be using Postponed VAT Accounting (PVA). Rather than paying import VAT to your freight forwarder at the point of import (and waiting until your next VAT return to reclaim it), PVA allows you to account for it on your VAT return immediately — paying and reclaiming in the same period, with zero cash flow impact. It is free, it is available to all VAT-registered importers, and if you are not using it you are unnecessarily lending money to HMRC.