Part 4 of our Guide to Growing Your Business Internationally looks at that most joyous of business responsibilities – Paying Tax.
It’s obvious that you must pay international taxes correctly, just as you do in the UK. But did you realise that tax should be something you think about while planning your business expansion. Why? Because tax issues determine how overseas operations should be set up, product pricing, and how you manage your cash.
Here’s some of the basics you’ll need to explore.
The Three Questions That Determine Your Tax
Paying taxes abroad can be pretty complex. And you can double that complexity if you manufacture goods, or are providing services, from the UK to another country as you’re liable for both the local market taxes and applicable UK taxes.
Even if you don’t manufacture or run a services business locally, if the funds are ending up back in Blighty, the tax man will take his cut.
Tax is loosely determined by how you answer the following three questions:
1) Where do you manufacture and sell to: UK, EU, or outside the EU?
For trading purposes the European Union (EU) is a single market with no frontiers between the member states. This means that goods can move freely between them, only incurring formal customs costs when goods leave the EU. Goods leaving the UK but remaining in the EU are called ‘dispatches’ while goods going outside of the EU are called ‘exports’.
But the second dimension to location is whether you produce locally in the UK and then export those goods elsewhere – making you an ‘exporter’ – or manufacture within the foreign market you are trading in. Neither are good or bad, and both options will incur taxes, but there can be a dramatic difference in costs when you explore the tax implications of either scenario. (You need to be aware of this before finalising your distribution strategy.)
2) What are you selling?
Quite simply, do you sell goods or services? There’s a different tax for that. (You can read more about the differences between providing goods and services here.) And then of course within goods and services taxes apply dependent on the type and class of those goods as well as the quantity sold.
3) To whom are you selling?
Your last tax differentiator is based on who you sell to – Business-to-Business (B2B) or Business-to-Consumer (B2C)? If selling to Businesses there’ll most likely be some type of Value-Added Tax (VAT) to calculate. And if selling to consumers you’ll apply a Sales Tax at Point of Sale.
How to Learn The Basics of Tax
Luckily, within in the UK at least, the Government, UKTI, and HMRC are keen that you understand tax as much as possible (to ensure you pay what you are supposed to) and have created some really good guides to the process. Have a look at:
- For exporters: ‘Starting to Export’ an online and downloadable guide to exporting both inside and outside of the EU
- For service providers: ‘Selling services overseas: international trade regulations’
- Straightforward online courses from HMRC and UKTI: ‘Trading with other EU countries’ and ‘Exporting Goods’
How to Approach International Tax
Even when you have educated yourself on some of the tax basics you’ll know by now that you need specialist advice on tax while planning your move into an overseas market. We’d recommend using a combination of some, or all, of the below:
- Your local tax advisor/accountant (even if they have no knowledge of the market you are going to be trading in they need to be aware of your plans and can advise on UK tax implications and what tax relief is available)
- A specialist tax advisor with knowledge of trading in your chosen market
- The local market tax regulatory body (i.e. their equivalent of HMRC)
At this point in time you may even choose to revisit your Distribution Strategy – and that’s OK! It’s better to know this stuff in advance than to start trading and find out your profits just don’t stack up once taxes are applied.