There are various types of tax payable at import, the most common types being import duty and value added tax. However, your goods may also be liable to excise duty (alcohol, hydrocarbon oil), antidumping duty, climate levy, etc.

In this article, we discuss the topic of import duty. Each commodity that we import has an associate rate of duty payable, normally influenced by its origin. The UK Tariff provides the exact rate of duty applicable to the product we are importing. In the UK, import duty is generally applied ad valorem, meaning that it is calculated on the value of the goods.  

The first question if therefore: how do we know the value of the goods?

According to Customs Notice 252, something is very clear: the value of your goods is not necessarily the price you paid for them. 

https://www.gov.uk/government/publications/notice-252-valuation-of-imported-goods-for-customs-purposes-vat-and-trade-statistics

HMRC lists 6 methods to calculate the value of the goods.

Let’s start with Method 1.

Method1: Transactional value

This method takes into account the price paid by the buyer to the seller for the goods in question. However, you could have imported goods which have a certain value although you may have paid less – or even nothing at all if the goods were free of charge. In this case, you may need to use Method 2

Method 2: Value of identical goods

This method uses the value of identical goods available for sale. If the goods you’ve imported are no longer available for sale, you may need to use Method 3

Method 3: Value of similar goods

If you are unable to arrive at a value using any of the 3 previous methods, you can use Method 4, or 5.

Method 4: Selling price of the goods in the UK

Method 5: Cost of production

Method 6: Covers anything else, typically requiring prior agreement with HMRC.

Note: there are specific supporting compliance documentation to be produced and held on file for each of these methods as use must be justified at HMRC audit.

Let’s concentrate on Method 1, which according to HMRC accounts for over 90% of the goods imported into the UK.

Although Method 1 is undoubtedly the easiest approach, it’s not necessarily as easy as it seems. Apart from the value of the goods itself, HMRC clearly stipulates that there are other elements which we should include in our duty calculations and some which can legally be deducted.

HMRC requires that we include in the dutiable value the cost of the transportation to the UK plus any insurance purchased to cover the goods. We refer to the Cost of the goods, plus the Insurance and Freight to the UK - or CIF value - as the value of the landed goods, in other words the value of the goods at their point of entry in the UK.

If the goods are sold on any of the pre-CIF (Cost, Insurance and Freight) Incoterms ®, such as FCA (Free Carrier), your invoice price will only reflect the price of the goods.  In this case, to obtain the value of the landed goods, you would need to add to the invoice price, the cost of the Insurance plus the cost of the international freight.  

If the goods are sold on any of the post CIF Incoterms ® (for example DAP – Delivered At Place), your invoice price will already include everything needed: Cost of the goods, Insurance and Freight to the UK). In this case, the value of the landed goods could equate to the value of the invoice. 

There may be, however, some elements which can be legally removed from the value of the landed goods, therefore reducing the overall amount of duty payable.

For instance, the invoice price may include a UK sales commission, UK transport costs or processing costs in the UK. These amounts should be deducted from the invoice price to obtain the true value of the landed goods. In other words, you need to exclude any costs incurred after the point of introduction in the UK because they would not subject to import duty.

Discounts can also be deducted, but care must be exercised. Not all discounts are allowable. In general, discounts for quantity, trade discounts, cash and early settlement discounts can be lawfully deducted only when they are generally available to any buyer and not linked to special arrangements or if the relationship between seller and buyer affects the price, such as in the case of related companies.

In summary, if we can use Method 1 for valuation purposes, we can apply this formula: 
Value of the landed goods =

Cost of the goods +

Insurance +

Freight to the UK

The ad valorem duty payable will be a percentage value calculated on the value of the landed goods.