Customs Duty VAT Guide
Customs duty is payable on the importation of most goods from outside of the European Union.
Unlike import VAT, customs duty is not recoverable so increases the cost of the goods being imported. It is therefore essential that companies importing goods proactively manage their customs duty liability in order to maximise their profitability.
There are a variety of ways in which the amount of customs duty payable can be reduced and, in certain circumstances, removed completely.
The amount of customs duty payable on import depends on a number of factors, but the most important are the nature of the goods being imported and their value.
The nature of the goods determines their tariff classification, which sets the rate of duty that will apply on import. Some goods have a zero rate of duty but there can be significant differences in the rate of duty being applied to what would appear to be similar types of goods. It is therefore essential that the most appropriate tariff classification is used in order to minimise the amount of customs duty being paid as use of the wrong classification can result in overpayments of duty.
If it is established that an incorrect classification is being used and too much duty is being paid, the importer will be able to reduce their future duty bill by using the correct classification. In addition, a retrospective claim can be made going back up to three years to recover overpaid customs duty in the past. Both of these measures will directly increase the profitability of the importer.
Customs duty is charged on an ad valorem basis so the amount payable is determined by the value of the goods being imported. As a result, if the goods are being declared at a higher value than is legally required, there will be an overpayment of customs duty and a corresponding reduction in the profitability of the importer. It is therefore essential that the valuation at importation is fully considered to make use of any available reliefs.
As with the incorrect classification of goods, there may be an opportunity to make retrospective savings if incorrect values have resulted in overpayment of customs duty in the past.
If imported goods are re-exported after processing, customs duty will be due on importation unless a relief is claimed. Inward processing relief (IPR) is available for this purpose and allows a business to either suspend the payment of duty on import or pay the duty and claim it back once the goods have been re-exported.
Outward processing relief (OPR) is available when goods are being exported outside of the EU for processing before being re-imported. Using OPR will relieve the goods from duty which would otherwise be chargeable when the goods re-enter the EU.
When goods are imported, VAT is due at the same rate as if the supply was made locally. This VAT is fully recoverable unless there is a specific restriction on the type of expenditure or the importer is not making wholly taxable supplies. Therefore, for the majority of businesses there should be no VAT cost when importing goods. However, where international businesses are unsure of international legislation, VAT that is being incurred on the importation of goods may not be recovered.
This mainly arises because Accounts Payable staff are not aware that VAT has been charged, often because of the way in which the VAT is invoiced by the agent responsible for importing the goods. The problem often arises when Shared Service Centres process purchase invoices with the result that the import VAT is expensed thereby increasing the cost of the goods and reducing the profitability of the importer.
If VAT has been underclaimed historically, it may be possible to make a retrospective claim to the tax authorities. However, as time limits for making claims can vary around the EU, it is important that any issues are identified as quickly as possible to maximise the retrospective recovery.