Globalisation is probably the single most notable feature of the world economy. The sale of goods and services across international boundaries opens up huge new markets, not just for established multinational corporations, but for increasing numbers of small and medium sized enterprises (SME’s).
This may be great news for thousands of UK businesses, but just what does it take to sell your goods or services overseas – how do you go about the business of exporting and what are some of the pitfalls?
At first sight it might seem incredibly complicated, with all sorts of rules, regulations and controls with which to contend – and that’s even after you have identified some of your potential overseas markets.
As with many seemingly complicated processes, however, things are likely to appear far more manageable when broken down into some of their key components– this guide is intended to do just that.
Whenever you are thinking of taking your business in new directions, such as expanding your markets overseas, a certain amount of additional funding may be necessary.
You may find that your overseas buyers, for example, need to purchase what you are selling on credit terms. Clearly, this may prove a risky business, since you have no certainty that the buyer is actually going to pay. To help cover against such a risk of non-payment, the UK government operates a UK Export Finance insurance scheme to guarantee that you receive the money even if the buyer defaults on the payment.
UK Export Finance (from the Export Credits Guarantee Department) may also be used to guarantee UK bank loans that may be advanced to overseas buyers, thus giving the bank greater confidence and security in making such a loan.
As many SME’s may have already discovered to their cost, however, raising any kind of finance – including help in funding an export business – has become increasingly difficult.
In that case, you might want to consider a far more straight forward, quick and simple short-term business loan. Here at Merchant Money, for example, such small business funding may be taken up for loans of up to £50,000 and repayable within 24 months or less.
In order to understand some of rules relating to British exports, it might be helpful to consider the subject in bite-sized chunks. For these purposes, consider whether you intend to sell and export to a country that is:
- within the European Union (EU);
- outside the EU; or
- outside the EU, but via a country within the EU.
Within the EU
The EU is an economic union that allows for the free circulation of goods within its boundaries. This means that neither you nor your buyer has to pay duty on such goods and they may be sold across frontiers within the EU without any customs inspection.
If your buyer or buyers are VAT registered in the country to which you are exporting you do not even need to pay VAT, but simply record their VAT registration number on your own VAT records. If your buyers are not VAT registered, however, you are likely to be liable for the payment of VAT in the UK.
This is an issue that may confuse many first-time exporters. The ins and outs of VAT in the UK tend to be something of a nightmare for many SME’s, so you may wish to visit the website of HM Revenue & Customs for the full details about VAT on your exports.
Outside the EU
Things become a little more complicated if you are exporting to a country outside the UK – to a “third country” as it is known in government circles.
In such cases, your exports require:
- an export declaration and, possibly, an export licence;
- the payment of taxes and customs duties in the country to which you are exporting your goods.
The export declaration, in particular, may prove something of an administrative burden, especially for small UK businesses. The declaration may be completed online, but still involves a three-stage process:
- step 1 – register for an Economic Operator Registration Identification (EORI) number;
- step 2 – register under the Customs Handling of Import and Export Freight (CHIEF) system; and
- step 3 – submit the completed export declaration through the National Export System (NES) which is part of CHIEF.
Because of the time and effort these steps are likely to take – not to mention the proliferation of so many acronyms! – many British exporters employ the services of a freight forwarder, who is able to handle the whole process on their behalf.
VAT is only payable on goods and services for use within the EU. If you are exporting to a non-EU country, therefore, you do not have to pay VAT – but still need to zero-rate them for VAT services and retain proof that the goods were actually exported.
Outside the EU, but via a country within the EU
These are known as “indirect exports” and involve still more paperwork and documentation:
- an export declaration – relating to the country of final destination as well as the transshipment country within the EU;
- depending on the final destination of your goods, these may also be subject to export licences and other controls;
- if your exports come into the category of certain types of controlled goods (typically those of a strategic military nature) you need a trade control licence for their movement between two countries outside of the UK;
- if you are arranging the transshipment of goods through the UK you may need a transshipment licence; but
- the good news is that there is no VAT payable for goods destined outside the EU – although you may need to be able to prove that they actually left the EU.
Marketing your exports
If it is worth having jumped through all of these hoops, you are likely to have already identified your overseas markets, considered whether your competitors in the UK are also targeting the same customers and taken the steps already described to insure yourself against non-payment for the goods you sell.
To make the most of the opportunities presented by your overseas markets, you may also want to revamp your marketing strategies and tactics to suit your new customers.
Clearly, this is likely to involve translating all the literature about your product into the relevant foreign language or languages. But it is also likely to involve redesigning your packaging, and reviewing the tenor and approach most likely to suit the cultural mores of the country into which you are exporting.
One of the particular risks faced by exporters is the fact that exchange rates may change – both quickly and significantly. Changes have a direct impact on the revenue you receive and the profitability of your export trade. In order to help smooth out some of the adverse effects of currency fluctuations, you might want to consider balancing the income you receive in a foreign currency with the expenditure you need to make in the same currency.
No need to re-invent the wheel
If you decide that your business might benefit from an expansion into foreign markets, you might want to remind yourself that many other small businesses have been there before – they have the experience and knowledge that may smooth your own progress and help steer you away from some of the pitfalls.
You might want to expand your network of contacts amongst other exporting small businesses and also take advantage of the guidance offered by the British Chambers of Commerce and the government-sponsored Overseas Business Networks initiative.
Finally, the legalities and requirements of setting up an export arm to your business can be complicated and liable to change over time. The above information should be used as a guide only – for further advice, visit HMRC.