Customs Duty vs Import VAT: Differences, Calculation Base and Deduction

Customs duty vs import VAT – the basic difference

Customs duty is an import charge set by the customs tariff. Its rate depends on the commodity code (CN/TARIC in the EU, the commodity code in the UK) and on the country of origin, because a trade agreement can reduce it to zero. Import VAT is a tax on goods charged when they enter the importing country, and its rate depends on the type of goods in the country of clearance: in the UK it is most often 20%, in Poland 23%. Formulas and worked examples are in How to calculate duty and VAT when importing from the UK.

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What duty is based on: the customs value

The starting point is the customs value, which is in principle the price actually paid or payable for the goods (Article 70 of the Union Customs Code), plus specified additions. Transport and insurance are added only up to the place where the goods enter the customs territory – in the EU this follows from Article 71(1)(e) UCC (Regulation 952/2013), and in the UK from HMRC guidance (GOV.UK: delivery costs to include in the customs value). Costs of carriage after the goods have entered the customs territory therefore do not raise the customs value.

Other items to include are commissions (other than buying commissions) and packing costs, licence fees related to the goods, and materials or designs supplied to the seller free of charge. An error in the customs value changes both duty and VAT, so the invoice, transport document and declaration must be consistent.

What import VAT is based on

The import VAT base is the customs value plus the duty due and other import charges such as excise. Because duty is part of the base, VAT is charged on a higher amount than the customs value; calculating VAT on the invoice price alone is a mistake. The extent of additional delivery costs counted in the VAT base differs from the customs value rules, so check current HMRC guidance (UK) or the VAT Act (Poland).

If the goods have preferential origin and duty is 0%, import VAT is still due – the preference applies only to duty. In practice the VAT rate depends on the type of goods, not on whether duty was paid. For VAT settlement in Poland see How to settle VAT on import.

Deduction and settlement: Postponed VAT Accounting

Duty is not deductible – it forms part of the cost of the goods. A VAT-registered business can deduct import VAT as input tax where the goods are used for taxable activity. In the UK, a business registered for VAT in the UK can choose Postponed VAT Accounting (PVA) on its import declaration: import VAT is then not paid at the border but accounted for on the VAT return. The option is selected when the declaration is made and cannot be changed after submission (GOV.UK: account for import VAT on your VAT Return). Monthly PVA statements are available online. More on the mechanism: Postponed VAT Accounting UK, and on deferring payment: Can you defer VAT?

Who pays and who is liable

The charges are paid by the debtor named in the declaration – usually the importer. Under direct representation the customs agency acts in the importer's name and, as a rule, is not liable for the debt, whereas under indirect representation the agency is jointly and severally liable for the customs debt with the importer (in the EU see Article 77(3) UCC). The importer should therefore know the data in the declaration and check it before approval.

Common mistakes

• an incorrect tariff code, which changes the duty rate and sometimes the VAT rate,
• a customs value without transport and insurance to the border, or one not updated after a price change,
• VAT calculated on the invoice price rather than on the customs value plus duty,
• no proof of origin, so the preferential duty rate cannot be applied (more: UK-EU rules of origin),
• PVA not selected on the declaration, which means VAT is paid at clearance.

Records, corrections and refunds

According to HMRC, customs records must be kept for 4 years and VAT records for at least 6 years (GOV.UK: Archiving your trade documents). In the EU customs records are kept for at least 3 years (Article 51 UCC). In the UK, repayment or remission of overpaid import duties is claimed online or on form C285 (GOV.UK); for imports into Poland, import declarations are corrected in the systems of the National Revenue Administration (PUESC). Refunds are covered in Customs duty and import VAT refunds.

Unsure how to work out the charges for a particular consignment? Get in touch and we will check the code, origin and calculation base before clearance. For what the service costs, see How much does UK customs clearance cost.

Frequently asked questions