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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. Unlike import VAT, it generally cannot be reclaimed, even by VAT-registered businesses — in most cases it simply increases your cost of goods. There are specific reliefs (returned goods relief, inward processing, and repayment claims where duty was overpaid), but these apply in narrow circumstances rather than as a routine offset.

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 so that imported goods bear the same tax as 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

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 duty rate under the UK Global Tariff is 12% — and for this example, assume the goods don't qualify for a preferential rate.

• 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.

A note on that 12% rate: from 15 July 2026, the UK–India Comprehensive Economic and Trade Agreement (CETA) removes UK duty on most Indian clothing and textiles. Goods that meet the agreement's rules of origin — and are covered by a valid proof of origin — enter at 0%, which in this example would cut the duty to nil and reduce the VAT base accordingly. The 12% UKGT rate continues to apply to goods that don't qualify.

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. Where the sale is made through an online marketplace, it is the marketplace — not the seller — that is liable for the VAT. And for business-to-business sales where the UK buyer provides its VAT registration number, the seller does not charge VAT at all: the UK business accounts for it on its own VAT return under the reverse charge. Excise goods such as alcohol and tobacco are excluded from the £135 regime entirely.

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.