What is a Tariff?
Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
Governments are keen to protect their domestic trade and promote the interests of their industries, so they impose tariffs on commodities they import to make them less desirable than domestic goods and services.
A tariff is essentially a tax which increases the price of the imported products. It is imposed by customs at the border before the goods enter the country.
Why tariffs are used
The imposition of a tariff is a way of restricting trade on specific goods from specific countries. For example, the UK government might add duty to American breakfast cereals to make them more expensive than British varieties, thereby encouraging UK consumers to buy British. Governments also use them to protect nascent markets from competition.
Protecting domestic industries isn’t the only reason governments impose tariffs on imports – they’re also used to raise revenue and as political leverage over other countries.
Impact on UK businesses
If you trade in non-EU countries, you can expect to pay a tariff which pushes up the price in that market. Brexit has also changed trade rules with the EU – prior to the UK exit, there was a free trade agreement. Since January 2021, UK goods can now be subject to customs tariffs in EU countries. The rules around tariff rates and origin of goods are complex and are now subject to the EU–UK Trade Cooperation Agreement.
How tariffs work
If you trade abroad, search for the right commodity code and supply certain information. You also need to make a customs declaration. Commodity codes help classify imports and exports, so you can find out what customs duty you must pay and if you’re entitled to any relief.
The UK government website has a useful tool for helping find the right commodity code for your imports and exports.
The code classifies the goods based on origin and constituent product components so you pay the right customs duties, import tax and VAT. Six-digit commodity codes, also called HS codes, are used by the World Customs Organisation Harmonised System to monitor worldwide trade and apply international measures. Eight- or ten-digit codes are used on internal trade between EU countries.
The UK Tariff tool checks whether you’re using the right code, but it also searches for additional information:
- If there is a trade agreement (you may pay less import duty)
- If you need a licence to move your goods
- If your goods are subject to one of the following:
- Agricultural policy
- Anti-dumping duties (protectionist tariffs imposed on a market if the government thinks they are below fair market value.)
- UK safeguarding measures (remedies to protect domestic industries from disruptive trade flow e.g. quotas or tariffs)
- Tariff quotas (allow you to import a certain number of goods at a lower rate of duty)
Duties are collected by Customs on goods coming into and going out of the country. The code you use tells them what you need to pay.
Frequently asked questions
How do tariffs affect the economy?
Tariffs affect trade on certain goods by raising the price of imported goods, which makes them less competitive than domestically produced goods. It’s a way of promoting the domestic economy at the expense of foreign imports.
How do tariffs affect business?
They increase business costs and reduce profit margins, which forces companies to increase prices and pass them onto the consumer. It makes trade less competitive.
Who benefits from tariffs?
They benefit the importing countries by protecting their domestic market and raising customs revenue. They can also act as a negotiation starting point between two countries.
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