By Emily Coltman FCA, Chief Accountant to FreeAgent
If you’re thinking about growing your business, you may have considered whether you can provide goods and services to new customers based overseas.
But what groundwork should you put in place first before you start working with foreign clients?
Identify where your customers are coming from
Assuming that you’ll be selling goods or services online, it’s likely you’ll need some kind of basic infrastructure in place to get new sales leads and to sell to overseas customers. So, it’s worth comparing the cost of using an online trading site against simply having your own website.
Take a look at the main online trading sites like Alibaba, Elance, Etsy and eBay and see if they can help you promote your services to a wider audience. Just remember that you’ll have to properly account for any fees and commission that these services charge in your books.
If it’s a fee deducted from your sale (for example if you charge £1,000 for a project won through Elance, but they charge you a service fee), you’d have to still include the full £1,000 in your business income and then record the service fee as a cost in your accounts.
If it’s a flat fee - for example if you list 30 items over a month on Etsy, who then charge you a total listing fee of $6 - you would have to look up the exchange rate at the end of that month, translate the fee into £ sterling and record that as a cost in your accounts (as either Bank Charges or Cost of Sales.)
Check if you’re going to be an employee
Before you start any work for an overseas client, it’s vital to make sure you know whether you’ll technically be classed as their employee or not. In the UK, any individuals who pretend to be in business but who are actually their customers’ employees in all but name are liable to be taxed as employees by HMRC - and depending on whether the individual trades as a sole trader or a limited company, that tax may be due from the individual’s limited company or from their ultimate ‘employer’.
These arrangements are scrutinised because HMRC gets more cash from an employer—employee relationship, as employers have to pay National Insurance on the cost of their employees’ wages. And, as other countries are likely to have a similarly complex set of rules when it comes to tax on employees, you should make sure that if you’re working on a project for a foreign company and are based overseas for a while, you don’t fall foul of the local equivalent of this regulation. Discuss your situation with the local tax authorities in the country where you’ll be working, well in advance of you actually starting any work, so you don’t get caught out.
Decide how to invoice for overseas work
Your customers may find it easier to pay you in their own currency rather than yours. And while it's absolutely fine to issue invoices in a foreign currency, it can be an extra administrative burden to have to process receipts in lots of different currencies. One approach would be to invoice in two or three common and widely-used currencies, such as £ sterling, Euros and US dollars.
HMRC says that if you issue VAT invoices in a foreign currency, you must also show on the VAT invoice the amount of VAT in £ sterling, as well as in the foreign currency. HMRC doesn't, strangely, also have a requirement to show the total amount due in £ sterling too.
When you enter foreign currency invoices into your accounts, you need to translate them into £ sterling, using a commercial rate such as that provided by xe.com or oanda.com, as at the invoice date. You'd also need to keep track of the amount that your customers owed you in foreign currencies, and take account of any exchange rate fluctuations that would affect the sterling equivalent of what your customers owe.
For example, you may have issued an invoice for €1,200 at a time when £1 = €1.20, so that invoice would initially appear in your accounts as £1,000. If at the end of the month your customer had still not paid and the exchange rate had moved to £1 = €1.25, you would need to revalue the amount owed by that customer to £960. The difference of £40 would show in your profit and loss account as a loss on foreign exchange.
Decide how to take payments
Some businesses that make a lot of overseas sales will set up a bank account in a foreign currency, so they can easily send and receive money in that currency. And if you’re using an online accounting system, you can use this to manage multiple currency banking easily in your accounts.
However, remember that foreign currency bank accounts can often be costly to set up, and you may find it difficult when it comes to actually transferring money from one currency account to another. One alternative option would be to use another system like PayPal which allows you to accept payment in multiple currencies without having to set up a new bank account, and can translate your money into £ sterling when you receive it - although they are likely to charge a fee for this.
You may also want to see whether your bank will collect cheques or accept bank transfers from international customers, without you setting up a foreign currency bank account - although these transactions can take longer to process and may cost more than those from your UK customers.
In any of these cases, you’ll also have to make sure that you record any bank charges or PayPal fees correctly in your books.
Check if you need to register for international VAT or other taxes
Check the rules to see if you'll need to register for VAT, or its equivalent sales tax, when you're making sales to customers in a different country. The rules may be different if you're selling goods or services, and also if you're selling to businesses or consumers, and depending on where your customers are based.
For example, businesses based in the UK that are selling goods into the wider EU, to any customers other than businesses who are registered for VAT in their own countries, must check the distance selling thresholds for each country where their customers are, and track how much they're selling to customers based there. A UK business selling goods to Irish consumers, making sales of more than €35,000, must register for Irish VAT and charge its Irish customers Irish VAT rather than UK VAT. Below the distance selling thresholds, you can still choose to register for local VAT, but if you are below the threshold, not registered for local VAT, and selling to anyone other than locally-VAT-registered businesses, you would charge your customers UK VAT for your goods.
Remember that selling to customers overseas can be a complicated process involving many different tax rules and regulations to navigate - so if you’re unsure about anything, you should speak to an accountant with expertise in these issues first.
Emily Coltman FCA is Chief Accountant to FreeAgent, which provides the UK’s market-leading online accounting system specifically designed for small businesses and freelancers.