How to Avoid Paying Import Tax Amazon FBA – Import Duty & VAT Guide

How to Avoid Paying Import Tax Amazon FBA – Import Duty & VAT Guide

CALCULATE-IMPORT-DUTY-AND-VAT

Paying unexpected amounts of import tax and VAT can turn very profitable shipments into ones that cost you dearly. Therefore, it’s important to understand how to calculate import duties and VAT, know how much a certain product will cost to import and where possible, know how to avoid paying import tax and VAT altogether.

This is quite a daunting topic for new Amazon FBA sellers and one that may not be familiar to many. However, with a bit of importing under your belt and a few mistakes in my case, it becomes pretty simple.

Hopefully, this guide will allow you to get on with the importing bit and avoid the mistakes bit! Specifically, I will cover importing goods from outside the EU to the UK. However, many of the same principles will apply in other regions.

Disclaimer: I am neither an accountant nor tax advisor – I’m a random bloke on the internet. Please consider hiring a professional for tax help and advice.

What taxes have to be paid when importing goods?

Assuming no previous knowledge, in general, you will need to pay both import duty (aka import tax) and VAT (Value Added Tax).

VAT

VAT has a set rate of 20% in 2019 and is set by the government. This is non-negotiable and we are obliged to pay it in all but a few exceptional circumstances, which I will cover later.

VAT is calculated as a percentage of the ‘customs value’ of the goods you are importing + the import duty.

Customs value = The price you have paid for the goods + the shipping cost + the insurance cost (if you’re smart and paid for some).

Import Duty

Import Duty differs in the fact it is variable. Its rate varies on the type of product you are importing, again decided by the government and regularly changing. Many products are duty-free however, a conservative estimate of about 10% will act as a good ballpark estimation.

Import duty is calculated as a percentage of the ‘customs value’ of the goods you are importing.

I was led to believe import tax would be calculated solely on the price of the goods; this is not correct – it’s on the customs value!

As mentioned, some goods attract very low or even zero duty, here’s a list of some duty-free products for reference:

  • Books
  • Desktop computers
  • Laptop computers
  • Mobile phones
  • Tablets
  • Video game consoles

Additionally, certain countries and transportation methods attract reduced duties if you can satisfy the requirements. This is known as ‘preference’ – for more information check out the gov.uk website here.

Have a read of paragraph 1.3, this will guide you to the relevant sections. Note: this is for slightly more advanced importers, those less experienced may wish to save this for later when more clued up.

The government categorises all products using a Harmonised System code, also known as an HS code or commodity code. Make sure you look up what HS code is applicable to your goods and thus what rate you will be paying in import – guide below.

If you’re buying goods from Alibaba, check out my guide to The Cheapest and Safest Way to Pay on Alibaba: TransferWise

How to find the HS code for a product

To save estimating and get an exact import duty rate, head to the trade tariff lookup service, anther gov.uk website here.

Click on ‘Start now’.

Now, either click through the categories to find a product or type in the search bar.

For example, for some chopsticks, type it in, click chopsticks in the dropdown menu.

Find the option that best describes the product. In this example, let’s look at some bamboo chopsticks. The information can be seen here however, it’s best to click on ‘Chopsticks’ again to bring up a more detailed page.

Here we can see all the import details: HS code (commodity code) of 4419120000, VAT of 20% and import duty of 0%. This is a particularly lucky example being duty-free. If you repeat the process for a tent for example, you would find an import duty of 12%.

Avoid Import Duty and VAT by staying under their threshold values

Although largely inapplicable, some importers may be able to save money by importing goods in smaller quantities and thus stay under the minimum thresholds.

For business purchases, import duty is not payable if:

  • Total order value is worth £135 or less.
  • Total amount of import duty payable does not exceed £9.

For business purchases, VAT is not payable if:

  • Total order value is less than £15 with the exception of perfumes, tobacco and alcohol (VAT is always payable for these items regardless of value).

More info can be found here https://www.gov.uk/goods-sent-from-abroad/tax-and-duty

As you can see, there’s likely to be few circumstances where this can be taken advantage of, but it’s worth knowing just in case you can!

Customs duties and VAT applicable to gifts and personal purchases

A very common trick of overseas suppliers is to mark goods as ‘gifts’ in a bid to evade tax and duties. In my experience, this works about 80% of the time and it works because goods marked as gifts from outside the EU are subject to different payment thresholds.

VAT is payable on gifts if:

  • The goods are worth £39 in value or more.

Import duty is payable on gifts at a reduced rate of 2.5% if:

  • The goods are worth £135 – £630.

Goods of £630 or more in value are subject to reduced rates dependant on origin and type.

At first glance, this may appear a very handy trick however, there are consequences…

Why undervaluing goods or pretending they are gifts is a bad idea

My suppliers, particularly from China, will regularly undervalue shipments on the customs declaration form (or mark it as a gift) to reduce fees. Lower fees are great for both us and the supplier, right?

Wrong!

Firstly, and most importantly this is an illegal practice. Secondly, you will likely have shipments held up after a goods inspection has revealed that they are undervalued. At the very least this will delay the goods in customs while you have your supplier reassess the value of the shipment and provide updated paperwork.

Thirdly, any goods that are undervalued upon import will screw up your accounting! Cheaper cost of goods will effectively increase your profit margin on paper and thus force you to pay more corporation tax.

Additionally, for VAT registered businesses, be very careful using DDP (delivery duty paid) shipping terms from suppliers. They are very likely to undervalue your shipment which makes managing VAT a nightmare. I would advise using a trusted freight forwarder instead to ensure you get correctly completed paperwork and are operating within the law.

Always remember that as the importer, we are responsible for the goods in all respects when they arrive into the UK – not the supplier.

How to calculate import duty and VAT payable

Finally, here’s a quick guide to calculating import duty and VAT which you can follow and use every time you need to import a new product to the UK.

To set the scene, let’s pretend I have a camping brand for which I’m importing a new synthetic tent for my ‘Everest’ range… I will be importing to the UK from China.

Step 1: How to calculate the customs value

Customs value = The price you have paid for the goods + the shipping cost + the insurance cost.

Thus,

$8000 worth of tents + $1000 to ship them by sea + $500 insurance = $9500

Therefore, Customs value = $9500

Step 2: Convert customs value to GBP

For the calculation of taxes, the customs value must be converted to GBP in line with the HMRC exchange rate. Use their monthly exchange rate detailed here. The current rate for USD to GBP is 1.213.

Thus, $9500 / 1.213 = £7832 customs value

Step 3: How to calculate import duty payable

Use the gov.uk website here to find the HS code and import duty payable. For synthetic tents, the import duty is 12%.

Thus, £7832 x 0.12 = £940 import duty payable

Step 4: How to calculate the VAT payable

VAT is currently 20% in 2019, so we apply this to the sum of the customs value and duty paid.

Thus, £7832 + £940 = £8772

Therefore, £8772 x 0.20 = £1754 VAT payable

Step 5: How to calculate total landed cost

Landed cost = total product cost + all import fees

Therefore, £8772 + £940 + £1754 = £10,526 landed cost

That’s it! Hopefully, you can agree now that it isn’t too difficult once you have a vague understanding of the terms.

This will enable you to accurately calculate landed costs for future products however, luckily, we don’t need to do this, our supplier or freight forwarder will do it for us. Although now that you know, always double-check their maths to make sure there are no mistakes or monkey business.

For paying suppliers overseas, I use Transferwise and thoroughly recommend you do too, if you haven’t heard of them, read my review here

Should I use a freight forwarder?

Small and light orders via courier – I don’t think a freight forwarder is necessary in this instance. All customs clearance will be handled by the courier such as DHL, FedEx, UPS etc. Do still double-check the paperwork and make sure to ring the company if there is anything you don’t understand – they are usually pretty helpful in my experience.

Larger orders via air freight and sea – Absolutely use a freight forwarder. Start to build a relationship with a UK based company before your orders get too enormous if possible. The level of service can be tailored by the forwarder, from very little to the whole process. A good freight forwarder will make your life very easy!

A quick last word of advice:

Don’t get caught out by additional import duties!

A good friend of mine who has multiple successful brands, selling on and off Amazon made a big mistake with one of his recent brands. I won’t divulge the niche however, I will give you a clue in that the imported products had two wheels.

After doing lots of analysis, the deal looked sweet and the shipment arrived into the UK. Upon arrival at customs, he was unexpectedly hit with an enormous bill for extra import fees called anti-dumping duty.

This effectively reduced a healthy 25% profit margin to 0%.

The products sold and he moved on, having made a slight loss on the whole venture. It could however, have been much worse. So long story short, have a read about anti-dumping duty here and make sure it doesn’t apply to your goods!

Parting thoughts

Hopefully, you now have the tools to both understand and calculate import duty and VAT, but also to avoid it if you’re lucky.

Some key points:

  • VAT has a standard rate of 20% in the UK.
  • Import duty is variable, some products are duty-free.
  • Explore getting a ‘preference’ with HMRC for reduced rates.
  • Consider operating below threshold values to avoid all fees.
  • Be wary of suppliers undervaluing or marking goods as gifts.
  • Consider using a freight forwarder if not using a courier service.

Take care,


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How to Avoid Paying Import Tax Amazon FBA – Import Duty & VAT Guide
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How to avoid paying import duty and VAT when importing to the UK. Your complete and easy guide to working out fees before ordering!
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