What is customs valuation?
Customs valuation is the process HMRC uses to determine the monetary value of imported goods. That value is used to calculate how much import duty you owe. Get it wrong, too low or too high, and you risk penalties, delays, or overpaying. Getting it right starts with understanding how the system works.
If your supplier has sent you a commercial invoice and you are not sure what figure to declare to HMRC, this article explains the whole process in plain English.
Customs valuation affects every UK import. It is the foundation of your duty calculation. Use the wrong figure and you either underpay duty (which can trigger penalties) or overpay (which costs your business money unnecessarily).
This article covers the six valuation methods, how Incoterms affect the number you use, common mistakes, and a worked example in £ so you can see exactly how it all fits together.
Customs valuation is the process of establishing the value of goods to calculating import duty.
When you import goods into the UK, your customs declaration, submitted through the Customs Declaration Service (CDS), must include a declared customs value. HMRC uses that figure to work out how much duty you owe.
The formula is simple:
Customs value × duty rate = import duty payable
The duty rate comes from the commodity code you assign to your goods. The customs value is what this article is all about.
Customs valuation rules in the UK follow the WTO Agreement on Customs Valuation, which sets a common international framework. This means the same basic rules apply in the UK, EU, US, and most other trading nations, though the UK has applied its own legislation since Brexit through the Customs (Import Duty) (EU Exit) Regulations 2018.
Your customs value directly determines your duty bill. A higher customs value means more duty. A lower customs value means less, but only if it is genuinely correct.
Here is why you need to get this right:
It affects your costs. Import duty is a direct cost to your business. If you are importing goods with a 12% duty rate and your customs value is off by £10,000, that is a £1,200 error on a single shipment.
It affects your VAT. Import VAT is calculated on the customs value plus the duty. So an incorrect customs value cascades into an incorrect VAT figure too.
HMRC can challenge it. HMRC has the power to query any customs valuation it believes is incorrect. If they reject your declared value, they will substitute their own, and may issue a demand for unpaid duty, plus interest.
Errors can trigger audits. Persistent valuation errors, even unintentional ones, can lead to HMRC compliance checks across your entire import history.
Getting customs valuation right is not just a technical requirement. It protects your cash flow, your compliance record, and your relationship with HMRC.
The WTO Agreement on Customs Valuation sets out six methods for valuing imported goods. They must be applied in strict sequence, you can only move to the next method if the previous one cannot be used.
In practice, Method 1 applies to the vast majority of commercial imports. Methods 2 through 6 are fallback positions for situations where Method 1 is not available.
| Method | Name | When Used | How Calculated |
|---|---|---|---|
| 1 | Transaction Value | The price was actually paid for the goods | Price paid/payable, adjusted for additions and deductions |
| 2 | Transaction Value of Identical Goods | Method 1 cannot be applied; identical goods were recently imported | Value of identical goods imported at or around the same time |
| 3 | Transaction Value of Similar Goods | Methods 1 and 2 cannot be applied; similar goods were recently imported | Value of similar goods imported at or around the same time |
| 4 | Deductive Value | Methods 1–3 cannot be applied; goods are sold in the UK after import | UK selling price, minus post-import costs (duty, profit, overheads) |
| 5 | Computed Value | Methods 1–4 cannot be applied; production cost data is available | Cost of production plus profit and general expenses |
| 6 | Residual Method (Fall-back) | None of the above apply | Flexible application of Methods 1–5 with reasonable adjustments |
Methods 4 and 5 can be applied in reverse order at the importer’s request, so if Method 5 is easier to apply than Method 4, you can ask to use it first.
Method 1 is the primary valuation method. It applies whenever you can answer yes to all of the following:
If all of those conditions are met, your customs value is based on the price actually paid or payable for the goods, adjusted for the additions and deductions set out in the next two sections.
The transaction value is not simply the invoice total. It requires careful review of what is included in the invoice price and what needs to be added or stripped out.
The starting point is the price on your commercial invoice. But that figure may need to be adjusted before it becomes a valid customs value.
The following elements must be included in the transaction value if they are not already reflected in the invoice price:
Commissions and brokerage fees. Buying agent commissions, paid by the importer to an agent who arranges the buy, must be added. Selling commissions (paid by the seller to their own agent) are already included in the price and do not need to be added separately.
Assists. An assist is something the importer provides to the seller free of charge or at reduced cost to help produce the goods. Common examples include:
The value of assists must be added to the transaction value.
Royalties and licence fees. Royalties or licence fees related to the goods that the buyer must pay as a condition of the sale must be included.
Packing costs. The cost of containers and packing, including the labour involved, must be included if not already in the invoice price.
Freight and insurance to the point of entry into the UK. These costs must be included in the customs value if they are not already reflected in the price. This is the CIF element, and it is where Incoterms become critical (covered in the next section).
Once you have your invoice price, you may need to make adjustments in both directions.
Add these costs if they are not already included:
Remove these costs if they are included in the invoice price:
Keep clear records to support every addition and deduction you make. HMRC may ask you to justify them.
The Incoterm agreed with your supplier determines who pays for freight and insurance, and that directly affects whether those costs are already included in your invoice price or need to be added.
UK customs valuation requires a CIF (Cost, Insurance, Freight) value, meaning the customs value must reflect the cost of the goods plus freight and insurance to the UK point of entry.
Here is how common Incoterms interact with customs valuation:
CIF or CIP, value is usually correct as stated. Under CIF or CIP terms, the seller pays for freight and insurance to the UK destination. Those costs are included in the price the seller quotes. Your invoice price is typically already a CIF value, so it can often be used as the customs value without adjustment.
FOB, you must add freight and insurance. Under FOB terms, the seller’s price covers costs only to the port of loading. You, the buyer, pay the main freight and arrange insurance. Those costs are not in the seller’s invoice. You must add the freight and insurance costs to arrive at a CIF customs value.
EXW, you must add more. Under EXW (Ex Works), the seller’s price covers only the goods at their premises. You pay for everything from collection at origin to UK arrival. You must add origin haulage, export handling, freight, and insurance to reach the correct customs value.
DAP or DDP, you may need to deduct post-import costs. Under DAP or DDP terms, the seller’s price may include costs that arise after the goods reach the UK border, such as UK inland delivery. Those post-import costs must be deducted before using the figure as a customs value.
The key principle: the customs value must represent the CIF value at the UK border. Adjust your invoice price to reflect that, whatever Incoterm you used.
Customs valuation does not just affect your duty bill. It also affects the import VAT you pay.
UK import VAT is calculated on the customs value plus any import duty. The formula is:
(Customs value + import duty) × VAT rate = import VAT
So if you understate your customs value, you will also underpay import VAT. That is a more serious compliance issue, since VAT errors are subject to their own penalty regime.
One important threshold to know: goods with a customs value of £135 or less are exempt from UK customs duty. However, VAT still applies, it is collected at the point of sale for goods sold directly to UK consumers, or on importation for business-to-business transactions.
Most UK VAT-registered businesses can reclaim import VAT through their VAT return, so the VAT is often a cash-flow consideration rather than a net cost. But the declared value must still be correct.
If you are importing goods from a company you are connected to, a parent company, subsidiary, or associated company. HMRC treats the transaction with additional scrutiny.
Related-party transactions are not automatically disqualified from Method 1. But HMRC will want evidence that the price charged between related parties reflects the true commercial value of the goods, not an artificially low figure designed to reduce the duty bill.
There are two ways to show that the transaction value is acceptable:
Test values. You compare your transaction value against one of the following: the transaction value of identical goods sold to unrelated buyers, the deductive value, or the computed value. If your related-party price is close to those benchmark values, HMRC will generally accept it.
Circumstance of sale. You show that the price was set in a way that reflects normal commercial practice for the industry: for example, consistent pricing methods used across the group, or independent verification of the price.
Transfer pricing for customs purposes and transfer pricing for corporation tax purposes follow different rules. A price accepted by HMRC for tax purposes is not automatically accepted for customs purposes.
Keep detailed documentation of how related-party prices are set. If HMRC opens an enquiry, you will need to show your working.
HMRC can query any customs valuation it believes is incorrect. This can happen at the time of import, where goods are held pending clarification, or after the event, through a post-clearance audit or a Revenue Trader Compliance visit.
If HMRC decides your declared value is wrong, the following can happen:
HMRC substitutes its own value. HMRC will use one of the six valuation methods to determine what it believes the correct value is. It will then issue a demand for any underpaid duty and VAT.
Interest is charged. Customs duty that is found to be underpaid attracts interest from the date it should have been paid.
Penalties may be issued. If HMRC decides the error was careless or deliberate, a penalty may be imposed. Errors that you disclose voluntarily attract lower penalties than errors HMRC discovers independently.
You have the right to appeal. If you disagree with HMRC’s decision, you can request a review by HMRC and, if still dissatisfied, appeal to the First-tier Tribunal (Tax Chamber).
The best protection against HMRC challenges is good record-keeping. For every shipment, retain:
HMRC guidance on customs valuation is published at gov.uk/guidance/customs-valuation.
These are the errors that appear most often in HMRC compliance checks.
Using the FOB price when CIF is required. This is the most common mistake. If your supplier quoted FOB and you declare that figure without adding freight and insurance, your customs value will be too low. Always check your Incoterm and adjust accordingly.
Forgetting assists. If you supply your manufacturer with tools, moulds, designs, or materials free of charge, those costs should be added to the transaction value. Many importers overlook this because the costs are not on the commercial invoice.
Not declaring royalties. If your product uses a licensed brand, design, or technology and you pay royalties to a third party, those royalties may need to be added to the customs value. The test is whether the royalty is a condition of the sale.
Undervaluing related-party transactions. Declaring a below-market price for goods bought from an associated company is a red flag for HMRC. If you are buying from a related party, document your pricing methodology carefully.
Using a pro forma or sample invoice value for commercial shipments. The customs value must reflect the actual transaction price, not an estimated or sample price.
Incorrectly deducting discounts. Only discounts that are reflected in the actual invoice price at the time of sale can reduce the transaction value. Retrospective rebates and volume bonuses agreed after importation cannot reduce the customs value.
Including post-import costs without deducting them. If your supplier’s DDP price includes UK delivery, you must deduct those domestic costs before using the figure as a customs value.
Before Brexit, goods moving between the UK and EU were not subject to customs duty. Since 1 January 2021, imports from the EU are treated in the same way as imports from any other country. Customs valuation now applies to all imports from the EU.
This was a major change for many UK businesses. Companies that had previously brought goods in from EU suppliers without any customs paperwork now need to establish customs values, commodity codes, and duty rates for those goods.
Key points for UK importers post-Brexit:
UK Global Tariff applies. The UK has its own tariff schedule, the UK Global Tariff, with its own duty rates. These are not always identical to EU rates. Check the duty rate for your commodity code at trade-tariff.service.gov.uk.
UK Customs Declaration Service (CDS) is mandatory. All import declarations are now filed through CDS. Your customs broker or freight forwarder will handle this, but you need to provide them with accurate valuation information.
UK EORI number is required. You need a UK EORI (Economic Operators Registration and Identification) number to import goods. If you do not have one, apply via HMRC before your first shipment.
Rules of origin affect duty rates. Under the UK-EU Trade and Cooperation Agreement, EU-origin goods can enter the UK at 0% duty, but only if they meet the relevant rules of origin. If your goods do not qualify, the standard UK Global Tariff rate applies. Rules of origin do not affect customs valuation, but they affect the duty rate applied to the customs value.
Let us walk through a complete customs valuation and duty calculation for a UK importer.
The shipment
Jamie works as a shipping coordinator for a UK retailer that imports ceramic tableware from a supplier in China. The supplier quotes on FOB Ningbo terms.
Step 1: Start with the invoice price
The commercial invoice shows:
Step 2: Add freight and insurance
Because the terms are FOB, Jamie’s company arranged and paid for the main freight and insurance. The costs were:
Total freight and insurance to add: £510
Step 3: Calculate the CIF customs value
Customs value = £6,000 + £510 = £6,510
Step 4: Apply the duty rate
The commodity code for ceramic tableware is 6911 10 00. The UK Global Tariff duty rate is 12%.
Import duty = £6,510 × 12% = £781.20
Step 5: Calculate import VAT
Import VAT is charged at 20% on the customs value plus duty:
Import VAT = (£6,510 + £781.20) × 20% = £7,291.20 × 20% = £1,458.24
Step 6: Total landed cost summary
| Item | Amount |
|---|---|
| Invoice value (FOB) | £6,000.00 |
| Freight and insurance | £510.00 |
| Customs value (CIF) | £6,510.00 |
| Import duty (12%) | £781.20 |
| Import VAT (20%) | £1,458.24 |
| Total landed cost | £8,749.44 |
Jamie’s company is VAT-registered, so the £1,458.24 import VAT can be reclaimed on the next VAT return. The real additional cost on top of the supplier invoice is the £781.20 import duty and the £510 freight and insurance, a total of £1,291.20 on a £6,000 buy.
This example shows why the Incoterm matters. If Jamie had declared the FOB price of £6,000 as the customs value without adding freight and insurance, the duty would have been calculated on an understated figure, and HMRC could issue a correction demand later.
What is the customs value?
The customs value is the monetary value of goods as declared to HMRC to calculating import duty. In most cases it is the price paid for the goods, adjusted to a CIF (Cost, Insurance, Freight) basis at the UK point of entry.
How do I calculate customs value?
Start with the price on your commercial invoice. Then add freight and insurance to the UK if not already included (as required by your Incoterm). Add any commissions, assists, or royalties not in the invoice price. Deduct any post-import costs that are included in the price.
What are the six methods of customs valuation?
The WTO provides six methods in order of priority: (1) Transaction Value, (2) Transaction Value of Identical Goods, (3) Transaction Value of Similar Goods, (4) Deductive Value, (5) Computed Value, and (6) the Residual Method. Method 1 applies to the vast majority of imports.
Is customs value the same as the invoice price?
Not always. The invoice price is the starting point, but it may need to be adjusted. If your goods were bought on FOB terms, you must add freight and insurance to reach the CIF customs value. If the invoice includes post-import costs, those must be deducted.
Are goods under £135 exempt from customs duty?
Yes. Goods with a customs value of £135 or less are exempt from UK import duty. However, VAT still applies and is generally collected at the point of sale rather than at the border.
What happens if I get the customs value wrong?
If HMRC determines your declared value is incorrect, they can demand unpaid duty plus interest. Penalties may apply if the error is found to be careless or deliberate. Voluntary disclosure of errors attracts lower penalties.
Do Incoterms affect customs value?
Yes. Customs value must reflect the CIF value at the UK border. Under FOB terms, you must add freight and insurance. Under EXW terms, you must add all origin costs plus freight and insurance. Under DDP terms, you may need to deduct UK delivery costs.
Where can I find HMRC’s guidance on customs valuation?
HMRC publishes detailed guidance at gov.uk/guidance/customs-valuation. This includes the Customs Valuation Handbook with worked examples and technical guidance for complex cases.
This article is part of a learning path — return to explore more topics.
Keep reading
What is DDP? Delivered Duty Paid (DDP) is an Incoterms 2020 rule where the seller takes on every obligation in the shipment, export clearance, international
International trade runs on language. Freight invoices, customs declarations, shipping instructions, and carrier contracts are packed with abbreviations and technical terms. If you don’t know
What is CIP? Carriage and Insurance Paid To (CIP) is an Incoterm where the seller pays for freight and comprehensive insurance to a named destination,
What is a commercial invoice? A commercial invoice is the primary document in international trade. It is issued by the seller to the buyer and
Explore modern logistics services, customs compliance and supply chain careers. Learn how transport and trade operations connect. See more here
If you’re new to international trade or shipping, the shipping Bill of Lading (BOL) can seem daunting. Often hailed as one of the most crucial shipping documents, it plays a vital role in the movement of goods, payment processes, and cargo release.
This practical guide demystifies the BOL, breaking down its functions, types, and the essential information you need to provide. By the end, you’ll have a clear understanding of how a BOL works in practice, ensuring you’re well-equipped to navigate the complexities of shipping.