The key fundamentals to address for any business considering exporting
9 min read
29 June 2015
Jane MacKay, partner at Crowe Clark Whitehill, provides sage advice on what to consider when exporting – including planning and research, tax structures, government support and protection.
We all know that the government is keen to get British businesses exporting – the March Budget gave an extra £7.5m to the UK Trade & Investment (UKTI) body to help businesses wanting to export to China.
For many, exporting – goods and services – is a no brainer. And if your export sales are going well it could be a natural next step to have a more permanent set up overseas. You might be looking to build on an already profitable company, or to set up a brand new single-purpose business. But unless you’ve got plenty of experience in this area, you may be unprepared for the various problems that can come up. What should you be thinking about before making the leap?
Planning and research that will be needed in advance:
Even if you have a good idea of the area where you want to operate, you may find you are able to set up in a country or location with a favourable regulatory regime and still service clients effectively in your preferred location. For example, Delaware is a popular state for setting up a company in the US because of its relatively low regulatory costs, and Malaysia or Singapore are popular as hubs for South East Asia because they combine low regulation with a highly skilled workforce and a time zone that can allow you to service customers 24/7.
Research your market
Take part in overseas events and trade fairs to research the market, attract customers and make contacts. UKTI has a national network of international trade advisers who can help you expand your business overseas with access to 40 approved support networks in high growth territories, including China, India and the UAE. The Foreign Office also has lots of information. Don’t forget your local business network in other UK companies which have already made the step and will be willing to share experiences.
Local people and skills
Will you be able to find local talent to drive your business expansion? If you have to send key members of the UK team, what impact will that have on your business?
Will you need to find a business partner? In some territories you cannot operate without one, in others, a local partner gives you the inside knowledge that can allow you to succeed more quickly. However, forming a successful partnership can take time and investment in the relationship. You may also want to ask a third party to do some due diligence to confirm your chosen partner is someone you are happy to be associated with.
Cultural and regulatory differences
Will you have to adapt your product or processes for the local culture and regulation? You need to be aware of, and plan for any changes in your process, registrations, and qualifications that you will need to make if you want to sell overseas as well as customs and import duties that may be applied.
Do you have enough money to fund an overseas expansion? As well as the initial capital investment, it is typical for an overseas venture to be loss-making initially, so you need to have plans in place to ensure that the costs of expanding overseas will not put your UK business at financial risk.
Read more about exporting:
- Eight quirky exporting rules you need to be aware of
- Exporting success: Think boundary-less, ecommerce, language and customers
- The legal implications of exporting
Possible tax structures and their implications for your business:
Setting up a local entity
If things go well you will need to establish a local entity. This may be a branch, a subsidiary company or some other local entity. The right local entity for your operations depends on a number of factors. For example where the overseas activities are initially loss making, you may prefer a branch structure so you can use the tax losses against UK profits.
Funding and repatriating profits
You need to consider how you will fund your overseas operations initially, so you secure tax relief on costs, and how you will repatriate the funds and any profits further down the line. Equity can be more difficult to extract than debt but you need to comply with local capitalisation requirements and any local currency restrictions. Repatriation of profits can incur local withholding taxes so you will need the right legal and commercial structure to allow you to charge management fees, royalties, interest, or to take a dividend so that you maximise your post tax return.
The tax or financial pitfalls of doing business overseas
Establish the credit rating of your customers and business partners and guard against non-payment by letters of credit or credit insurance.
Know the currency you are dealing with. If necessary take steps to protect your business against currency risk.
Register and pay tax
Make sure you find out the customs and duties that could apply to your products – and take advice on how to structure your contracts to manage the amounts and cashflow.
Your activities may mean you create an obligation to register for employment taxes, pay corporation tax and to account for VAT locally even with limited overseas presence. Make sure you understand and comply with local tax regulations from the outset and know when you will need to establish formal presence to manage your local corporation tax and the VAT obligations in each territory. If you incur non-UK VAT you may be able to recover it locally – which can be critical for cash flow in the early stages.
Be aware that you may not be able to claim corporation tax relief or to recover VAT on costs incurred by the UK entity on behalf of an overseas branch or subsidiary. Recharge these if possible as part of your management fee.
Just because a company is incorporated overseas does not mean it escapes UK tax (and vice versa). Tax authorities can look at where a company is managed and controlled so you need to consider how you manage – and from where you manage – your entities. You need to decide where key decisions will be made and how this is evidenced to avoid confusion and double tax charges.
Britain has a long history of trading overseas and it could be the best thing to happen to your business. But as with any big business decision, make sure you pay attention to the details and take guidance from those with experience. Doing otherwise could land you a practical and administrative headache of epic proportions.