In the latest of our series of trade explainers, we sit down with Matt Vick, academy trade and customs specialist at the Chartered Institute of Export & International Trade, as he explains what businesses need to know about valuations.
What do we mean by valuations and why do they matter?
Valuations are an often misunderstood and potentially complex part of international trade. But a valuation refers to the figure an exporter declares to calculate the full value of the trade. This is then used to calculate both the duty rate and VAT rate, which are paid by the importer. These are two separate figures and the VAT one will always be higher.
For the duty rate, the valuation itself is made up of a few things, including the commercial value of the goods, transport costs up to the port of import and potentially insurance. In the case of insurance, if the exporter has taken out an annual policy rather than a per-journey policy, you will have to attribute a percentage of this to the trade in question. This can be done by working out freight and commercial spend over a 12-month period and dividing that by the insurance premium. This figure can then be multiplied by the value of the current consignment.
A final part of the valuation is any headline costs for the purposes of VAT. This includes all the cost of import, including any onward transport from the port of import in the destination country and any fees for customs agents. These do not come into the duty calculation but must be declared for the VAT calculation. It also includes the cost of the duty paid, and in the UK the VAT adjustment. It’s common for businesses to get this wrong, and either end up over or underpaying duties.
How can the exporter’s responsibility vary here?
The valuation will need to reflect the incoterms that have been agreed between the exporter and the importer. For instance, if the exporter or supplier is shipping under DAP where they would take responsibility for arranging transport, the values they declare need to include freight costs and other fees associated with this. In the odd case where a supplier ships on DDP terms, they will also need to arrange the import declaration into the destination country.
This means they will have to do the full balance of valuation, as this incoterm puts that responsibility on the supplier.
What are the implications for UK importers?
These costs can significantly increase the cost of a product once the transport costs, insurance, import duty and VAT are taken into account. VAT-registered companies can, of course, reclaim the VAT but it will still have an impact on cash flow.
If organisations make use of freight forwarders or agents, they may well not be aware of what they are being charged, so it can be a wake-up call for those who haven’t fully understood this. It’s also worth pointing out that the cost of transport can vary hugely – sometimes to the point of making the deal uneconomical – so it’s important that any importer fully understands what they will be paying, and that exporters can provide this information.
Are there any tips on how to get it right?
The value declared on an import should never be zero. Even if goods have been bought as samples so wouldn’t have a commercial value, they would still need a customs value assigned to them, based on the actual correct value.
This might be very cheap, such as the cost of a few tile samples, but it needs to be accurate. There are customs procedure codes which can be used to waive the duty and VAT on those items. But you cannot just put an arbitrary £1 or €1 value, either.
Where can people go to for more information on this?
Often businesses will use freight forwarders or customs brokers to help with this, as they are experienced in what’s required to conduct valuations. Accountants may also be able to advise businesses on this, particularly around VAT.
A recent innovation here is postponed VAT accounting, where organisations can put the amounts they have received and owe on their VAT return, bypassing the need to pay the amount and then reclaim it. This should help from a cash flow perspective.
The government has produced guidance on how to work out the customs value of imported goods, which can also be used by exporters looking to provide information to their own customers. It’s also launching a new scheme called Advanced Valuation Rulings, which will provide individuals and businesses with advice and guidance on how to reach the correct figure, and can also offer a binding resolution on a valuation. In part this is recognition of the complexity of the current system, and the idea is to help train people on how to do it correctly so they can get it right in future.
