With billions of tonnes of goods imported and exported around the world every week, it could be utter chaos trying to classify them all for tax and other economic purposes. That’s why the World Customs Organization developed a harmonised system – a uniform way of coding international merchandise so each country can set and pay the right customs tariffs.

Here we simplify the complexities of Harmonised Systems (HS) codes, explain how they integrate with Import One Stop Shop (IOSS), Import Control System 2 (ICS2) and ecommerce software systems, and show you how to optimise them to scale so you can continue shipping successfully.

What are HS codes?

HS codes are a series of numbers generated from the international Harmonised Commodity Description and Coding System – generally known as ‘Harmonised System’ or ‘HS’ codes.

HS codes were developed by the World Customs Organization (WCO) to standardise the classification of goods moving through international customs for tax purposes.

Think of HS as a universal economic language for international trade. The ‘language’ is used by more than 200 countries and covers more than 98% of all international merchandise.

How are goods classified using HS codes?

HS categorises goods into over 200,000 product types, divided into 5,000 commodity groups, which are then sub-divided into 99 chapters.

Each of these 99 chapters (for example ‘pharmaceutical products’ or ‘iron and steel’) are given a specific number. Chapters are then divided into sections (for example ‘wadding, gauze or bandages’ under ‘pharmaceutical products’) and under those sections there are sub-sections for more details.

That’s why all HS codes are made up of at least six digits.

The first two digits are the chapter codes. The second two represent the specific heading under the chapter code. And the third two are sub-headings under the specific heading.

Let’s use trainers as an example. The HS code for trainers is 640411.

• 64 represents the chapter ‘footwear’
• 04 represents the section ‘footwear with outer soles of rubber, plastics, leather or composition and uppers of textile materials’
• 11 represents the sub-section ‘sports footwear; tennis shoes, basketball shoes, training shoes and the like’

But HS codes can be longer than six digits.

If I wanted to sub-categorise my trainers further, the code can include further details such as ‘having uppers of which over 50% is leather’ (20) and ‘for women’ (60).

This would make the HS code for my women’s leather trainers 6404.11.20.60

How do I find an HS code?

There are many software applications, tools and services available to help you find the right commodity code.

Some of these, such as Avalara, provide a range of financial and tax services. While others, such as Hurricane Commerce, can check and generate commodity codes, and integrate their API with retailers systems or third parties to ensure shipping data is complete, accurate and fully compliant.

For UK companies, the GOV UK website offers a free integrated online tariff tool for finding commodity codes, import duties, taxes and controls.

Why are HS codes important?

HS codes are crucial for calculating landed costs, including customs duties, taxes, and shipping fees.

When used correctly on your invoices and shipping documents, HS codes save you time, money and labour.

Get them wrong and your shipments could be delayed, denied import or seized. Or your receiver could pay the wrong tax. And this could lead to you having to pay penalties, storage costs, fines and/or VAT surcharges.

Allocating the wrong HS code could also affect how and when VAT is paid on goods imported to the European Union (EU).

How do HS codes affect IOSS?

Import One-Stop Shop (IOSS) is a new VAT scheme introduced after Brexit to simplify importing low value goods (under 150 euros per package) into the EU.

With IOSS, you collect VAT at checkout and ship your goods to your EU customers just as you did before Brexit.

Without IOSS, your EU customers are liable for custom fees, import VAT and any other applicable import duties. Without IOSS, your EU customers might go elsewhere.

One vital element of calculating the right VAT costs is ensuring the HS code is right. If a retailer has a large range of products within a product line, it’s easy to allocate the wrong or incomplete HS code.

But it’s not just VAT on the products themselves you need to consider. HS codes also play a major part in calculating shipping costs as well as the value of your product.

If you charge customers for shipping, they must pay VAT on those shipping costs. Get the HS code wrong, and the shipping cost could also be wrong.

What is ICS2 and why do I need to get ready for it now?

Import Control System 2 (ICS2) is the upgraded version of the original Import Control System (ICS) introduced in 2011. It is an electronic system that enables the customs authorities of the EU Member States to collect and process advance information on goods entering the EU.

ICS2 requires the submission of an Entry Summary Declaration (ENS) before goods enter the EU. The ENS contains detailed information about the goods, the sender, the receiver and the means of transport. This helps identify any threats or risks to safety and security – and helps customs authorities intervene at the most appropriate point in the supply chain.

The second release requires complete and accurate advance electronic data sets for all shipments coming to or via the EU by air including a mandatory HS6 code.

A third release is planned for March 2024.

How do I know if I am impacted?

If you’re involved in importing goods into the EU, you need to get ready for ICS2 now as it became mandatory for all importers and carriers in March 2023. You’ll need to ensure your systems and processes are updated to comply with the new requirements.

To avoid any disruptions to your supply chain, you should:

• Familiarise yourself with the new regulations and requirements
• Audit your IT and data systems to ensure you’re submitting the correct ENS data
• Have the necessary resources in place to meet the new obligations
• Ensure staff are trained

It’s worth noting that failing to comply with the new regulations could result in delays, fines, and other penalties.

Can I use a third party to support me with HS codes and ICS2?

Yes, you can. In fact, Intersoft has recently set up a partnership with Hurricane, a software company specialising in cross-border e-commerce. By integrating Hurricane’s solutions into its API, Intersoft can support its customers in ensuring compliance with regulatory events such as ICS2 and HS codes.

How can I simplify ICS2 and HS codes and optimise my ecommerce business?

If you run a relatively small ecommerce business with low-value goods or limited product lines, you could look up the HS codes yourself using the GOV UK Trade Tariff or other websites that list the HS categories, chapters and sections then record them in a spreadsheet.

You would need to check the codes periodically as the World Customs Organization updates HS codes every few years.

If, however, you sell high-value items and/or have multiple product lines, you might want to work with a partner such as Deloitte or Avalara to ensure you’re classifying your goods correctly and continually.