What is a commodity code, and does my business need one?

Does your business import or export goods? If you do, you’ll need a means to identify these goods when they pass through customs, so you pay the right customs duty and VAT. This is where commodity codes come into play.

Let’s define what a commodity code is, how to find the right commodity code for your products and how these codes function as part of the import/export process.

What is a commodity code?

A commodity code is the numeric identifier that’s used to classify goods for international trade. When importing or exporting goods, the commodity code is used by His Majesty’s Revenue & Customs (HMRC) to determine what VAT, tariffs, duty rates and restrictions apply for a specific product

The codes are typically 10 digits long, but only the first 6 digits are used worldwide and product specific decisions are particular to each country.

Which businesses need to use commodity codes?

You’ll need commodity codes if your business's supply chain involves a product crossing an international border. So, if you import or export any goods, you’ll need to find the specific commodity code for each product imported or exported.

The responsibility for using the correct code and paying the right duties lies with you, as business owner, not just with your shipping agent or freight forwarder.

For example, you might be an ecommerce retailer that uses overseas suppliers. Or a construction company importing equipment and machinery. In both scenarios, you’ll need to source the relevant commodity codes and quote them at customs. 

Who’s legally responsible for using commodity codes?

Some parties in the import/export process are legally required to provide commodity codes. Other parties don’t have that legal requirement, but could benefit from understanding how the codes work, or when they apply.

Parties who must use commodity codes:

• The importer of record: This is the business or individual that’s legally responsible for bringing goods into the UK. They must use the correct commodity code to determine the accurate customs duty, VAT and any other tariffs or import restrictions.
• The exporter: This is the business or individual that’s legally responsible for sending goods out of the UK. They must use the correct commodity code to complete export declarations and to ensure the goods meet the requirements of the destination country, as the codes are part of a global system.
• Customs agents or freight forwarders: These third-party professionals are legally obligated to use the correct commodity code on behalf of their clients when filling out customs paperwork. They act as the agent for the importing or exporting business.

Parties who might benefit from understanding the codes:

• Financial professionals (e.g. accountants): Understanding commodity codes helps an accountant give better financial advice by accurately forecasting a business's international trade costs, including customs duties, and by ensuring the business remains compliant.
• Small business owners with no international trade: Even if you don’t currently import or export, understanding commodity codes can be a useful part of your strategic planning. It helps you research potential new suppliers or markets and calculate the costs associated with international expansion.
• Marketing and sales teams: Understanding commodity codes helps sales teams in an exporting company give more accurate and comprehensive quotes to international clients. Quotes can include a realistic estimate of the tariffs that the customer will have to pay.

Risks of using an incorrect commodity code

As the importer or exporter, you have a legal responsibility to use the correct commodity code when your goods pass through customs.

Using the wrong commodity code can have a number of consequences, which could have a significant impact for the business. 

Potential outcomes include:

• Customs delays: Incorrect codes cause customs officials to scrutinise or reject declarations. This can lead to your shipment being held up at borders, delaying deliveries to your customers and slowing down logistics.
• Financial penalties: You may be fined by HMRC. Civil penalties can range from £1,000 up to £2,500 per contravention, and HMRC can go back up to three years to reclaim underpaid duties.
• Underpayment or overpayment of duty: Using an incorrect code can lead to you paying the wrong amount of customs duty or import VAT. If you underpay, HMRC will demand the shortfall, with potential interest and penalties.
• Seizure of goods: In serious cases, particularly if the goods are restricted or prohibited and the wrong code was an attempt to circumvent rules, the customs authorities can seize your shipment.
• Loss of trust and reputation: Repeated errors can lead to increased scrutiny from HMRC which may damage your business's reputation with customers and suppliers. This negative brand damage could be significant. 

The importance of commodity codes when importing goods

When you import goods into the country you’ll need to factor duty rates and import VAT into your costs and margins for the product in question. 

Duty rates are tariffs or taxes that are levied on imported goods to raise revenue for the government. In some cases, duty rates are used to protect domestic industries from foreign competition. 

Import VAT (Value Added Tax) is a consumption tax that’s charged on products brought into the country from outside the UK (including from the EU since Brexit).

Let’s find out more about how duty rates and import VAT are calculated, and how you can plan for these costs and factor them into spending and cash flow. 

How duty rates are calculated

Here are the key ways UK Customs will work out the duty rates on your products:

• Goods identification: The 10-digit commodity code precisely classifies each specific product. Its global Harmonised System (HS) portion (the first 6 digits) provides a universal description for all global customs teams.
• UK Global Tariff Lookup: Use the 10-digit code in HMRC's UK Global Tariff database. Using this official tool links your specific product to its associated duty rates, so you know the exact rate for the product.
• Duty rate determination: Each code is tied to a specific percentage duty rate. This rate is applied to the ‘customs value’ for the goods and often includes shipping, adding to the final duty that’s owed.
• Customs value basis: Customs duty is calculated based on the goods' customs value. This includes the product cost plus any international shipping and insurance costs up to the UK border.

How import VAT is calculated

This is how HMRC will calculate the import VAT that’s due on your imported goods:

• VAT rate indication: The commodity code for your goods also identifies the applicable UK VAT rate for imported goods (typically 20%). It helps determine if a reduced or zero rate applies to any of the items you’re importing.
• VAT calculation basis: Import VAT is calculated on the total value: this includes the goods’ cost, international shipping and insurance, plus any customs duty already paid, and other charges to the UK entry point.
• Postponed VAT Accounting: For UK VAT-registered businesses, using Postponed VAT Accounting (PVA) allows you to declare and recover import VAT on the same return. This helps you avoid any upfront payment, but you will need to quote the correct commodity codes as part of the VAT process.

How to plan and forecast these duty and import VAT costs

With multiple goods being imported into the country, and varying costs to account for, it’s vital that you’re in control of your spending and cash flow management.

Four key areas to manage and monitor will include:

1. Import planning: Thoroughly research the commodity codes, country of origin, and Incoterms associated with the goods you’re importing. This initial planning stage helps you make accurate cost assessments and stay compliant with the relevant customs regulations, preventing future problems and delays.
2. Cost forecasting: Accurately calculate the duty and import VAT for your goods, based on their commodity codes and total value. Include ancillary costs like shipping and agent fees. Use scenario planning to understand any future volatility in your costs, and the implications for your cash flow. 
3. Cash flow management: Use Postponed VAT Accounting (PVA) and consider deferring the duty to optimise your cash flow. It’s a good idea to think about currency risk and align your supplier payment terms with your sales cycle.
4. Accurate pricing: Calculate the full cost for each product, including all import duties, VAT and fees. By pricing your goods based on this true cost you’re in the best position to remain both profitable and competitive in the market.

How do you find the right commodity code?

You can locate the commodity code for your goods by searching using the Trade Tariff tool on the Government’s GOV.UK website. 

To find the correct code:

• Find the Trade Tariff tool: Go to the Trade Tariff search page and you’ll find a search section where you can look for the relevant commodity code.
• Search for your goods: Enter keywords that accurately describe your product (e.g., ‘leather shoes’, or ‘wooden chairs’). Be as specific as possible, including materials and the use of the product.
• Navigate the results: Review the search results and progressively click through the relevant sections, chapters, headings and subheadings. Each step narrows down the classification.
• Find the code: Scroll down until you find the most precise description matching your goods. The 10-digit commodity code will be displayed.
• Review the details: Check the commodity code's associated duty rates, VAT rates and any specific import/export licensing requirements or restrictions.

If you’re unsure that you’ve located the correct description and commodity code for your goods, it’s sensible to contact HMRC directly, or speak to an import/export adviser that can help you pin down the correct code. 

Tips for running an efficient importing and exporting business

As an import/export business there’s a lot of form-filling and red tape to navigate. 

The more organised you can be, and the better your overall understanding of commodity codes, the easier it will be to avoid any bureaucratic obstacles.

For example:

• Keep detailed records of your classifications, so you can quickly locate the commodity codes for regularly imported/exported goods. 
• Check codes regularly for updates, as codes can change annually. Make sure you’re using the most up-to-date codes and the correct duty rates.
• Provide accurate documentation when approaching lenders for trade finance. Having all the right codes and information to hand makes it easier when lenders make a decision about lending to your business.
• Keep a close eye on cash flow, so you’re in full control of the cash inflows and outflows associated with the import and export of your goods. Use cash flow forecasting to monitor your future cash position, inventory spending and any potential cash gaps. 

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