A factory quotes you $2.85 a unit. You do the maths at today's rate, add a bit for shipping, and it looks like a business. Then the freight invoice arrives, the customs bill lands, and the margin you planned has quietly halved.
Nothing has gone wrong. You just priced against the wrong number. Here is the one that matters.
The costs that make up your real unit price
Your landed cost is what a unit costs sitting in your warehouse, ready to sell. It is made of five things, and importers routinely forget the last three.
- Factory price (FOB). The per-unit price, usually quoted in US dollars, delivered to the Chinese port. Note the currency — a 5% swing in GBP/USD moves your whole cost base.
- Freight and handling. Sea, rail, air or express, plus origin charges, destination charges and delivery to your door. On small orders this is often the second biggest line.
- Import duty. Set by your product's commodity code — anything from 0% to 12%+. Guessing here is expensive.
- Import VAT at 20%. Reclaimable if you are VAT registered, but you still have to fund it.
- Everything else. Customs clearance fees, port charges, inspection, samples, and the cost of a bad batch — the one nobody budgets for.
How duty and VAT are actually calculated
This is the part that catches people out, and it is worth getting exactly right.
Duty is charged on more than your goods
UK import duty is calculated on the customs value, which for most China shipments means the price of the goods plus the freight and insurance to bring them to the UK border. If your terms are CIF, or the freight is not separately distinguishable, that transport cost sits inside the value duty is charged on.
In plain terms: you pay duty on your shipping, not just your product. A cheap unit price with expensive air freight is taxed on both.
VAT is charged on the duty as well
Import VAT is not 20% of your goods. It is 20% of the customs value plus the duty plus incidental costs of importing. So duty is taxed too. On a 4.7% duty line that is a small compounding effect; on a 12% line it is not.
The order that matters: goods + freight = customs value → add duty → add VAT on that total. Get this sequence wrong and you will under-price every product you sell.
You can defer the VAT cash hit
If you are VAT registered, postponed VAT accounting lets you account for import VAT on your return rather than paying it at the border and reclaiming later. It does not reduce the cost, but it stops import VAT eating your working capital on every shipment. Ask your freight forwarder to use it.
A worked example
1,000 units, quoted at $2.85 FOB, sea freight, USD/GBP at 0.79, duty at 4.7%:
| Cost | Per unit | Total |
|---|---|---|
| Factory price$2.85 × 0.79 | £2.25 | £2,252 |
| Sea freight, door to door | £0.62 | £620 |
| Import duty4.7% of goods + freight | £0.13 | £135 |
| Landed cost, ex-VAT | £3.01 | £3,007 |
The unit you thought cost £2.25 costs £3.01 — 34% more, before you have paid for a single inspection or replaced one broken item. Import VAT of roughly £601 sits on top as cash out, reclaimable on your return.
Sell that at £9.99 and you have a real business. Sell it at £4.50 because you priced off the factory quote and you are working for free.
Run your own numbers: our free landed-cost calculator does this maths in the correct order, including the VAT and margin check. No signup.
What is changing: the £135 relief is going
Today, imports valued at £135 or under get customs duty relief. The government has confirmed it is removing that relief entirely, alongside stricter declarations and a new "fiscal representative" regime for overseas sellers. The change comes into force by October 2028 at the latest, with the exact date set by Treasury regulations.
If your model relies on small parcels sliding under £135 — direct-to-consumer dropshipping from China especially — that advantage has an expiry date. Bulk importing with proper duty planning is where this is heading anyway.
The four mistakes that cost the most
1. Guessing the commodity code
Duty rates swing enormously by code, and the wrong one means either an unexpected bill or a compliance problem later. Look yours up on the UK Integrated Online Tariff before you commit to a price, not after.
2. Paying 100% upfront
Standard terms in China are 30% deposit and 70% before shipment. That 70% is your only real leverage. Hand it over early and you have no recourse if the goods are wrong. We never let a client pay the balance before an order has passed inspection.
3. Buying from a trading company you think is a factory
A large share of "manufacturers" on the big marketplaces are traders adding a margin in the middle. You pay more and you are one step further from the person who can actually fix a quality problem. Check the business licence, not the profile page.
4. Seeing the goods for the first time in the UK
By the time a container lands in Felixstowe, your options are bad and expensive. A pre-shipment inspection against an approved sample — done before the balance is paid — is the cheapest insurance in this business.
One more timing trap: Chinese factories close for 2–4 weeks around Chinese New Year (late January into February), and sea freight rates spike in the weeks before it. Plan orders around that window or you will be out of stock in Q1.
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How to check a Chinese supplier is legitimate — reading the business licence, the free official database check, and the payment red flag that costs importers most.