27th February 2019
Whatever the final Brexit deal looks like, the reality is we are likely to see changes in the administrative processes for passing goods across borders. But we are also told that with our newly acquired independence will come great opportunity for the UK to strike out and form new trading relationships with other countries of the world. Whether Brexit or new trade deals are the catalyst, or it is a natural next step for your business, if you are considering international trade, you need to be aware that whilst exciting and often fruitful, international trade does carry with it some additional administration and risk.
As someone that has spent many years working in and with companies that buy and sell goods overseas I have become used to managing the sometimes complex areas of international trade accounting. So, with a new international trade horizon forming, I thought it would be useful to share this knowledge with my clients and contacts by way of a two short guides to the basics.
In this first post, we look at Payment terms and VAT treatment – the financial side of international trade.
Following are key tips, personal insight, rules of thumb and general guidance. However, please always seek advice as trading terms with different parts of the World can vary hugely and this is by no means a definitive guide!
International & Cross Border VAT
As different countries have different VAT levels and different agreements with the UK, VAT is not as straightforward as when you trade in the UK – not that UK VAT is necessarily straight forward!
- General rule of thumb says where the customer is based determines VAT treatment
- The amount of VAT to be charged/payable, if any at all, depends on whether you are buying goods or services
- Reverse charge VAT – is where the purchaser declares the sale which effectively nullifies input and output VAT
- If you are using Reverse Charge VAT beware that it can put your taxable turnover over the VAT Threshold!
- As it currently stands the European Acquisition report will probably not apply post Brexit
- EC Sales list – This is a breakdown of sales by customer within Europe and cover goods and services
- Intrastat – This is a declaration of movement of goods within Europe. This report applies to goods only. (I am personally of the opinion that this report is mainly used by the UK Government for trade figures rather than tracking European wide trade!)
International Trade Payments
You may have a handle on UK to UK payments and be all over your credit control and cash flow, but international trade will be an entirely different set up.
- International bank transfers cost money and you will need to agree who picks up the cost of that. It is typically the originator of the payment but if there are fees both sides, it may be that you need to share these or pick up your fees and theirs!
- The Far East is notorious for asking for money up front or a Letter of Credit (LOC) – The still operate a cash economy and won’t release goods until money received. They may not even start production or source materials until they have a proportion/all of the money. And this may not change, even if you have worked/end up working together for many years!
- If international trade is likely to be a regular part of your business moving forward, consider setting up bank accounts in the relevant currencies you will be using e.g. $ or €. If you can afford to leave the proceeds/profits in there then you will reduce the impact of currency conversion costs and bank charges for moving funds.
- The USD$ remains the global currency of choice. Many countries around Africa, the Middle East and Far East will deal in USD$ as it is typically a more stable and trusted currency than their own. Did you know – there are more USD$ in circulation outside of the US than inside it!
If you are required to make upfront payment, here are a handful of acronyms/terms that you need to be aware of*:
- FOB – Full/Free on Board means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the destination.
- LoC – Letter of Credit is a letter issued by a bank to another bank (especially one in a different country) to serve as a guarantee for payments made to a specified person under specified conditions.
- Proforma – An upfront invoice that needs to be settled before goods are either manufactured or shipped
- ExW – Ex-Works means the buyer pays all costs from the factory gates
* Google Incoterms® for a full list of international commercial terminology
In the second post in the series, which will be published on my site in the next few weeks, we look at shipping and law – the more practical side of international trade.
If you are thinking of moving into international trade, please contact me or seek advice as trading terms with different parts of the World can vary hugely and this is by no means a definitive guide!