Value-added tax (VAT) is a form of sales tax used in the United Kingdom that applies to most sales of goods and services. Import tax, formally known as import duty, is a tax applied on the value of goods imported from outside the European Union (EU). Generally, VAT is payable by a seller, and import duty by a buyer.
VAT is technically charged on most sales at a standard rate. Some products or services such as fuel carry a lower rate. Other goods either carry no rate or are exempt. Though no money is payable in either case, the paperwork is different depending on the category.
Import duty is based on the value of the goods, but the precise rate depends on the type of goods.
Businesses eligible to pay VAT may choose alternative ways to calculate the tax due. One, the cash accounting scheme, means that VAT only becomes due when the customer pays for the product or service, not when the seller issues an invoice. Another, the flat rate scheme, means businesses simply pay a set proportion of their annual income. This can be advantageous or disadvantageous, depending on which rate categories the businesses sales fall into.
If the sale price of goods isn't available, import duty is calculated by one of five alternative methods. Each method in turn adds a greater degree of estimate and assumption to the calculation process. In brief, the methods are: based on previous imports of identical goods; based on previous exports of identical goods; based on the price the seller is offering to other buyers; based on the seller's production and transport costs plus profit margin; and making the best possible valuation on available evidence.
A company must register for VAT if its sales in any of three main categories exceed £70,000. These categories are: sales in the U.K. in the past 12 months, or expected sales in the next 30 days; goods received from other European Union countries in the past 12 months, or expected sales in the next 40 days; and sales from other EU countries to the U.K. during a calendar year.
Import duty is payable on all goods imported from outside the EU except for consignments with a total value of £18 or less, and gifts worth £40 or less. There's no annual threshold.
There are several countries that don't fall under the standard rules relating to EU membership and U.K. taxes. Goods from some parts of Cyprus are considered non-EU exports. Goods from Turkey, the Aland Islands, the Canary Islands, the Channel Islands, Mount Athos and several French dependencies do carry VAT. Goods from these countries don't carry customs duty — the standard import duty — but can carry an excise duty, which is a special import duty on goods such as alcohol and tobacco.
Consumers are liable to pay both import duty and VAT on goods imported from outside the European Union. Goods worth £18 or less, and gifts worth £40 or less are exempt from the taxes. In theory, the consumer could be asked to collect the goods from a customs office at the point of entry to the U.K. — such as the airport where the parcel arrived — but in practice, postal delivery companies pay the taxes, take care of the paperwork and reclaim the taxes from the consumer along with a handling fee before delivering the goods.