How to calculate import duty, and what landed cost really includes

The order of operations, which is where most errors live

Import charges stack, and each layer is calculated on the one below it. Getting the order wrong understates the total, usually by more than people expect.

First establish the customs value. Under the CIF basis used across the UK, EU and much of the world, that is the goods plus international freight plus insurance. The US is the notable exception, assessing duty on the FOB value — the goods alone — which is why a US duty estimate applied to a UK import comes out low.

Then duty is a percentage of that customs value, set by the commodity code and the country of origin. Then import VAT or sales tax is charged on the customs value plus the duty — tax on a tax, which is correct and which surprises people every time.

A worked example. Goods £10,000, freight £1,200, insurance £150, duty rate 6%, VAT 20%. Customs value is £11,350. Duty is £681. VAT is 20% of £12,031, or £2,406.20. Total charges £3,087.20. Applying 6% and 20% to the £10,000 invoice instead gives £2,600 — an understatement of nearly £500.

The commodity code does more work than anything else

The code you declare determines the duty rate, and rates within a single product family vary enormously. A few points of difference on a container is real money, and the classification is your legal responsibility even when a freight forwarder files it for you.

Origin matters as much as classification. Trade agreements can reduce a rate to zero, but only against valid proof of origin, and origin is where the goods were substantially transformed rather than where they were shipped from. Goods assembled in one country from another's components frequently do not qualify, and assuming they do is a common and expensive error.

Where a classification is genuinely ambiguous, most customs authorities will issue a binding ruling. It takes weeks and it is free, which compares well with a retrospective assessment plus penalties.

What else lands on the invoice

Customs brokerage. A per-entry fee for filing the declaration, plus charges for additional commodity lines. A consignment with thirty different products costs more to clear than one with three.

Port and terminal handling. Charged at both ends, and quoted separately from freight often enough to be missed when comparing quotes.

Demurrage and detention. Charged when a container sits at the terminal beyond its free days, or when you keep the container too long after collection. These are the charges that turn a delayed clearance into a serious cost, and they accrue daily.

Inland transport from port to warehouse, and any deferment or duty-payment account fees.

Landed cost per unit is the number that matters

Divide everything — goods, freight, insurance, duty, brokerage, handling, inland transport — by the units that arrived in saleable condition. Not by the units ordered. Damage and shortage are real and they concentrate the cost onto fewer sellable units.

Import VAT is usually excluded from landed cost for a VAT-registered business, because it is reclaimable and therefore a cash-flow event rather than a cost. Duty is not reclaimable and always belongs in the figure. Confusing the two either overstates your product cost or leaves you unable to explain a VAT return.

Recalculate on every shipment. Freight rates move violently, and a landed cost worked out during a cheap freight period will quietly mislead your pricing for a year.