Duties and VAT

It is vital to ensure that you pay the correct duties and VAT on all products that you import. There are number of different excise duties (e.g. Alcohol or Tobacco duty) that apply to goods, and you need to be sure that you are paying the correct rates.

In the majority of cases, you do not need to charge duty or VAT on exports. You must have official or commercial evidence of non-EU exports to not charge VAT. The rules are different depending on the product and whether it is being exported in or out of the EU. Before you start exporting, you must make sure that you are fully aware of any duty or VAT you need to pay when exporting.

As small businesses may not be VAT registered, the rules will vary depending on the product, you should be certain to clarify the duty or VAT you will need to pay, and how this will change if you register for VAT in the near future.

Depending on the amount you import and export, some business will be entitled to claim back some of the duty or VAT payments that you make. A number of businesses are also entitled to delay payment of duties (mainly for goods imported from outside the EU).

Customs Entries

If you are importing from outside of the EU or from special EU territories (including the Canary Islands and the Channel Islands), then the goods you bring in will almost always need to be entered and declared to Customs and Excise as they arrive (Either yourself or by an approved agent).

The vast majority of exports outside of the EU or to special EU territories also need to be declared to Customs and Excise as they leave the country.

If you are importing or exporting from within the EU, then a customs declaration is not usually necessary. Although if you are VAT registered, and your EU imports or exports exceed a set amount (currently £233,000 a year) you will need to fill in a supplementary declaration form each month.

Training

The exact details of import and export regulations are long and complicated, one way to help improve your businesses ability is to undertake import/export training. This will help you (or a chosen employee) to understand in more detail the rules and regulations regarding the products you move.

This will help to ensure that you pay all necessary duty, and are able to claim back all the money you may be entitled to. The cost of training can be quite high, but if your business is looking at importing or exporting in the long term, then the cost will usually be more than worth it.

The government offers some basic training and education in importing and exporting. More information can be found at the HMCE Customs and Excise website.

Import and Export Links

Customs and Excise National Advice Line -

Tel: 0845 010 9000

Customs and Excise summary of importing and exporting.

• Notice 501 a brief guide to import procedures
• Notice 502 a guide to export procedures
• Notice 600 explains the procedures for classifying goods
• Government education and support for importing and exporting

Department for Business Enterprise & Regulatory Reform (BERR)

Import Licensing Branch (ILB). Tel: 01642 364333/334

Government import and export info

International Chamber of Commerce Incoterms page

Remember

Are your products able to be imported or exported? Are they restricted, or do you need a licence to move them?

Will your products work once imported, or are modifications or extras needed for them to work? Are they compatible with the related products of the country? If not, you need to tell your customers.

Some products require instructions to be in the language of the country, you may need to produce them yourself to import them legally.

Every product has different duty and VAT rates, make sure you are fully aware of what you need to pay, and what you can claim back. (Especially if you are not currently VAT registered).

To avoid charging VAT on exports, you must have proof that the goods have been exported.

The majority of imports and exports to/from outside of the EU need to be declared to Customs and Excise. Those from inside the EU do not usually need declaring unless you are VAT registered and import/export over £233,000 worth of goods a year.

Training is a cost effective way to provide long term knowledge of the rules and regulations that govern your imports and exports.

It is important to arrange in advance which currency payment will be made in, and who will bear the costs of any conversion charges.

Payments in advance, or a letter of credit are the best methods of payment if you are exporting, but an open account is the best method if you are importing.

You can use Incoterms to make a set of fair terms and conditions for delivery. This will ensure that any problems are solved quickly and fairly.

‘Goods in Transit Insurance’ provides cover against damaged or late goods, if you are importing it is almost always worth taking.

There are several different ways to sell your products abroad, by looking at each method carefully, you will be able to find the most cost effective solution for your business and product in each market you wish to enter. Larger companies often use country expansion, but small businesses are usually better using direct sales or a distributor.

If you are exporting your products, have you thought about how they will be sold once the get to their destination country? There are three main ways of selling exported products:

Direct to Companies

This involves selling directly to companies that wish to import your products, which will then use them, or sell them to the general public.

e.g. Company X exports 100 computers at £150 each directly to Shop A; Shop B; and Shop C in France, who then sells them to the public at (the equivalent of) £200.

Direct selling allows you good control over where your products are sold; however, it relies on you having enough staff to deal with both UK and foreign orders. As a small business, the costs of employing more staff may limit the income you can gain from exporting; although if you are only dealing with small numbers of orders (I.e.: One big order not four little orders) then direct sales could prove quite cost effective.

The other drawback of direct selling is that the marketing of your product must all be carried out from the UK, making customer relations more difficult.

Distributor

This involves exporting your products to a distributor, who then sells and delivers to the shops.

e.g. Company X sells 300 computers to Distributor Y at £140 each. Distributor Y then sells 100 computers at £160 each to Shops A, B, and C, who sell them to the public at £200 each.

Using a distributor allows you to sell to a range of buyers when you export; there is no need to spend on extra employees to deal with individual sales. The main drawback of using a distributor is that they will take a percentage of each products cost, meaning that the profit you make from each item is lower.

Using a distributor is common for smaller businesses that do not have the capacity to sell in more than one country. The lower profit costs are often helped by the improved sales that an effective distributor can bring, although the vast majority of the marketing will still be left to you.

Country Expansion

This involves opening a branch or company division in the country you are exporting to. This allows you to deal with all the sales and marketing directly.

e.g. Company X opens a division in France (e.g. Company X France) which then sells 100 computers each directly to Shops A, B, and C at (the equivalent of)£150 each.

Expanding into a country will allow you to keep more of the profit than you would get through a distributor, and allows you total control over the sales and marketing of your product.

However, expansion is hugely expensive, and is a huge risk to any company. The vast majority of small companies would not be able to sell enough goods to make even a small country expansion cost effective; and are better off using direct sales or a distributor.

Licensing

This involves the export of your product to a licensee, who then sells and markets the product, in return for a large share of the profits. This may involve you exporting the parts, and the licensee constructing the product and packaging in the specific country.

e.g. Company X sells 300 computers to Company Z at £120 each. Company Z then pays for the marketing of the product, and sells 100 units at (the equivalent of) £150 each to Shops A, B, and C.

The main drawback of licensing is that you are left with little control over how your product is marketed or sold. You make less money off each unit, but you will also save on the costs of marketing and expanding abroad.

Licensing is usually only possible where the product is unique or manufactured directly by the company; products that are bought in cannot usually be licensed out.

Small businesses are not generally likely to use licensing for exports, as the sales are not usually big enough to attract licensees. The exception to this is with new inventions or products, where the small business or individual that creates the product cannot afford the costs of production, and licenses it out to another company (or a separate company in each country).

What is a Letter of Credit?

A letter of credit is a banking mechanism which allows importers to offer secure terms to exporters.

All letters of credit contain these elements:

• a payment undertaking given by the bank (issuing bank)
• on behalf of the buyer (applicant)
• to pay a seller (beneficiary)
• a given amount of money
• on presentation of specified documents representing the supply of goods
• within specific time limits
• these documents conforming to terms and conditions set out in the letter of credit
• documents to be presented at a specified place.

Put simply, the issuing bank’s role is twofold:

• to guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due. This offers security to the seller – the bank says in effect “We will pay you if you present documents (XYZ)”
• to examine the documents, and only pay if these comply with the terms and conditions set out in the letter of credit. This protects the buyer’s interests – the bank says “We will only pay your supplier on your behalf if they present documents (XYZ) that you have asked for”

Note that the letter of credit refers to documents representing the goods – not the goods themselves! Banks are not in the business of examining goods on behalf of their customers

Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill, an insurance document; but there are many others.

Letters of credit deal in documents, not goods.

The stages of the letter of credit

1. Buyer and seller agree terms, including means of transport, period of credit offered (if any), latest date of shipment, Incoterm to be used
2. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer’s credit standing, and may require cash cover and/or reduction of other lending limits
3. Issuing bank issues L/C, sending it to the Advising bank by airmail or (more commonly) electronic means such as telex or SWIFT
4. Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary). Advising bank MAY confirm L/C, i.e. add its own payment undertaking
5. Seller should now check that L/C matches commercial agreement, and that all its terms and conditions can be satisfied, (e.g. all documents can be obtained in good time.) If there is anything that may cause a problem, an AMENDMENT must be requested.
6. Seller ships the goods, then assembles the documents called for the L/C (invoice, transport document etc.) Before presenting the documents to the bank, the seller should check them for discrepancies with the L/C, and correct the documents where necessary.
7. The documents are presented to a bank, often the Advising bank. The Advising bank checks the documents against the L/C. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank
8. The Issuing bank now checks the documents itself. If they are in order (and it is a sight L/C), it reimburses the seller’s bank immediately
9. The Issuing bank debits the buyer and releases the documents (including transport document), so that the buyer can claim the goods from the carrier.

A more in-depth explanation of the ratings:

A1 – Steady political and economic environment is likely to further the already excellent payment record of companies. Very low risk probability.

A2 – Political and economic stability is generally good. Although the payment record of companies is not as good as A1, the risk is still considered low.

A3 – Unfavourable political or economic conditions MAY lead to a worsening of a payment record that is lower than that of A1 and A2. However, risk is still considered low.

A4 – Negative political or economic conditions is likely to worsen a patchy payment record of companies within this country. However, risk level is considered acceptable.

B – Unsteady political or economic conditions are likely to worsen an already poor payment record.

C – Very unsteady political or economic conditions are likely to worsen an already bad payment record.

D – Extremely unsteady political or economic conditions are likely to worsen an already very bad payment record.

Important

The ratings should only be used as a guide, as a good company could be within a country with a poor/less favoured rating. Likewise, a poor company could be within a country with a good/highly favoured rating.

It is therefore important to research the company as you would when trading with a company in the UK.

Country Ratings

You should use these country ratings as a guide only. Further research of the individual company is required to help you determine the payment risk more accurately.