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Successfully trading overseas: a tax perspective

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Managing overseas trading arrangements efficiently is vital, especially for small and medium-sized businesses with international key customers, for whom cashflow is more vulnerable to pressure if payments are delayed or local tax considerations are overlooked. So what can be done to reduce the risks associated with cross-border trading activity?

With the benefit of revenue growth in one hand, but the risk of a possibly disrupted working capital cycle, leading to cashflow difficulties in the other hand, expanding internationally should be managed carefully. Before SMEs decide to start trading in different territory for the first time, special consideration should be given to any potential consequences arising from this decision. Therefore, businesses should ensure sufficient resources are in place to deal with the effects of customs delays, longer delivery times or increased payment terms and should, at the contract stage, address local tax liabilities that could be incurred.

According to the Office of National Statistics (ONS), British businesses are exporting more goods and services than ever before, with numbers growing steadily over the past three years. This and the record breaking export value of £639.9 billion in the 2018/19 financial year, clearly shows the UK businesses’ resilience and willingness to trade internationally. Additionally, the Organisation for Economic Co-operation (OECD) reveals a UK export growth percentage of 13.8% between 2016 and 2018, which easily exceeds Germany (10.5%), France (10.1%) and Italy (11.4%).

Rather than rushing into increased export activity by simply relying on advice provided by overseas customers, small and medium-sized UK businesses should conduct their own research to ensure they understand local tax laws and how they could influence cashflow and profit margins. Also advisable, is seeking specialist advice in respect of their overseas trading activity.

Some expert advice to get you started:

Cash management

Protecting working capital should be a number one priority when intending to increase export activity. Cashflow modelling can reveal potential pressure points and help identify steps to be taken, such as renegotiating contract terms or lengthening payments terms with key suppliers, to improve the business’s cash position and ensure a healthy profit margin. Where risks are high, securing payment in advance by using Letters of Credit, after performing the necessary credit checks, can further relieve pressure on cashflow.

By combining data from profit and loss accounts, balance sheets and cashflow reports, three-way forecasting can also help de-risk the export drive. This technique provides the business with the necessary information to make strategic decisions and allows the implementation of mitigation strategies ahead of time.

Withholding taxes

The tax position in relation to contracts with overseas customers should be determined in advance and include terms and conditions outlining the trade agreement in order to prevent cash received not match the invoice amount. This commonly occurring issue is due to international customers avoiding the risk of any liability of underpaid tax passing over them, by withholding taxes when settling their invoices.

Also important to highlight, is the change in tax profile when a UK business starts to trade within a country rather than with a country, as in this situation their presence overseas gives rise to more significant local tax obligations. Researching the exact extent of in-country activities which give rise to a local tax presence, can help determine the business’ tax position.

VAT

Although most exports from the UK to countries outside the EU are likely to be zero-rated for VAT, providing the correct documentation and seeking expert advice where necessary, is important in order to be aware of any VAT liabilities that may apply.

An Economic Operator Registration and Identification (EORI) number, correct commodity codes and relevant export licences may be required by UK businesses selling goods and services in the EU, depending on the outcome of Brexit. Also registering for VAT and appointing a local fiscal representative may be necessary, if the business holds stock in an EU country.

Forward thinking

Establishing a local branch or subsidiary overseas may be worth considering if a business chooses to scale up its export drive, especially when they intend to have ‘boots on the ground’ in a specific country or area of the world. Many factors will determine the choice of operating structure, which in turn will significantly impact the business’ commercial and tax profile. Regardless, when establishing an overseas subsidiary, how it interacts with the existing UK business in relation to funds flows and profit management, will have to be given some proper thought.

Transfer pricing

Once trading overseas, the relevant tax authorities will be keen to make sure they obtain their fair share of tax and thus may look to the profits that are arising around the group on an arm’s length basis. Therefore, the interaction between different parts of the international group will need to be considered from a transfer pricing perspective. All cross-border transactions, such as for the use of intellectual property or technical support, will need to be identified and an assessment should be carried out on the market price of the assets and services being used. Eventually, this should result in a transfer pricing policy supporting the way in which the group operates.

Look before you leap

According to the latest SME Track 100, small and medium-sized businesses can clearly benefit from strong and sustainable returns when investing in export initiatives. However, always look before you leap to ensure this decision is supported by the necessary specialist knowledge and advice.

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