Selling services overseas: international trade regulations
Service exports make up about a quarter of UK international trade. UK businesses are major exporters in sectors such as financial services and consulting. UK businesses also buy services from overseas - such as outsourcing customer services to overseas suppliers.
Telecommunications and IT make it quick and cost-effective to trade services internationally.
Whether you are importing or exporting services, many of the same basic rules apply as for trade in goods. But there are key differences, from how services are marketed to the taxes and regulations that apply.
UK-based services exporters may also benefit from the commitments of UK trading partners under the World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS).
The EU Services Directive has removed many barriers to service businesses established in a member state to easily provide services throughout the EU.
This guide highlights the special features of trading in services and how to approach exporting or importing them.
Special features of trading in services
If you want to export services, much of your approach will be the same as if you were exporting tangible goods. Thorough research and a clear understanding of the local culture is a crucial part of entering a new market. But there are also some important differences.
- International services can be provided from within the UK, eg using the internet, or in the customer’s country, eg making a personal visit. The difference can have important legal and tax consequences.
- Without a physical product to sell, you need to take a different approach to marketing. For example, you can’t show samples to potential customers, or use a local wholesaler to distribute what you offer.
- The lack of a physical product also has important implications for contracts. For example, you are unable to use Incoterms to formalise where the service will be delivered or who is responsible for insurance.
- For many service exporters, protecting their intellectual property is a key issue.
Many similar issues apply to the importing of services.
Without physical samples, assessing supplier quality can be difficult. Recommendations and professional accreditation may be more important. See the guide on how to manage overseas suppliers.
Legal issues for international trade in services
Different business cultures, legal environments and languages increase the risk of confusion when you trade internationally. It’s important to have a clear contract.
With trade in goods, attention often focuses on responsibilities for delivery, set out using internationally recognised Incoterms. Other issues, such as what is being supplied, are usually relatively straightforward.
For trade in services, it’s almost the opposite. It can be difficult to specify exactly what services are to be provided, to what standards. It can be helpful to focus on what the desired outcomes are - ie what the service should achieve. This can be part of a service level agreement in the contract. See the guide on how to manage overseas suppliers.
There are other important legal issues to consider:
- The location of supplier and customer can vary, affecting which country’s regulations apply.
- You need to sort out payment issues such as choice of currency and protection against the risk of non-payment.
- You may need to take action to protect your intellectual property in other countries.
International trade in tangible products has defence mechanisms in place under the General Agreement on Tariffs and Trade (GATT). The GATT defines the rules for a complete trading system, including protection mechanisms, tariffs and trading terms. As they are universally in use and transparent, they make it easier to determine where disputes must be settled.
The WTO Agreements also include an agreement on trade in services - the GATS.
The EU Services Directive will remove many barriers and open the internal market within the EU to service businesses established in a member state. As of 2010, those in certain service sectors will be able to access new cross-border opportunities and enjoy less restrictive access to EU markets.
Delivering services internationally
There are four different ways in which services can be delivered internationally, depending on the locations of the supplier and the customer:
- Cross-border trade. Both supplier and customer are in their own countries, while the service crosses the border. For example, services like consulting can be provided by phone or over the internet.
- Consumption overseas. The customer visits the supplier’s country, where the supplier provides the service. For example, international travel and tourism services can be provided in this way.
- Setting up overseas. The supplier establishes a presence in the customer’s country. For example, a law firm or financial services provider might open a branch office overseas.
- Movement of individuals. Individuals who will provide the service travel to the customer’s country. For example, an architect might travel overseas to work on designing a building there.
The above methods of service delivery are defined in the WTO’s GATS.
As of 2010, the EU Services Directive will remove many barriers facing trade in services within the EU. In effect, this will bring service businesses established in separate member states closer to open trading.
The way the services are supplied has important implications for which country’s laws and taxes apply. For example, if you travel to another country to supply a service, you might be liable to pay local taxes on your earnings there.
If you are a service supplier, you should take care to ensure that you do not accidentally supply your service overseas. For example, if you offer financial services on your website, it might be seen in countries where this is illegal without a licence.
Marketing services internationally
The first step to successful marketing overseas is thorough research. You need to understand as much as possible about your target market.
You may need to adapt the service you offer to suit local requirements and comply with local regulations. You may also need to change the way you behave to suit the local business culture.
Sales and distribution
Without a physical product, it can be difficult for the customer to see what you are offering or to check that it meets their needs. Think carefully about what makes the service you offer credible and tailor your sales pitch accordingly. Professional qualifications, a convincing track record and experience on similar projects can be strong selling points.
Personal relationships can play an important part in selling services. You should be prepared to visit potential customers, perhaps several times.
Winning new services contracts can take much longer than it does to sell a physical product.
Depending on your circumstances, there may be other ways to get sales leads and increase your local profile. For example, you might join local professional bodies, or look for public relations opportunities such as speaking at conferences. In some industries, forming a relationship with a local counterpart can be very effective. For example, a UK law firm might recommend a French firm whenever its clients need French legal advice, and vice versa.
For some businesses, the internet is a very effective way of promoting and sometimes selling their services. See the guide on planning for e-commerce.
UK regulations and taxes for international trade in services
Unlike goods, services do not have to clear through customs. But there are regulations affecting service imports and exports:
- Most services can be exported or imported freely, though there are some restrictions, eg on technologies with potential military applications. See the guide: do you need an export or import licence?
- Profits on exports by UK businesses are generally taxed in the same way as any other profits. If you have an overseas presence, this could mean that profits are liable both to UK tax and to tax in another country. If so, you may be able to claim double taxation relief.
- If individuals need to travel overseas for a short time, UK National Insurance contributions usually continue to be paid as normal. The rules are more complex for employees or self-employed individuals who are going to work or live overseas longer term. Find information on National Insurance for those living or working abroad on the HMRC website.
- VAT on imported services provided to other businesses is charged in the country where your customer is based - not where your business is established. See our section on international trade, international visits and VAT. However the rules can be complex depending on the circumstances. If you are in any doubt, ask your accountant or contact the HMRC VAT Helpline on Tel 0845 010 9000. See the page on VAT on services supplied from abroad in the guide on imports and purchases from abroad: paying and reclaiming VAT.
UK-based services exporters may also benefit from the commitments of UK trading partners under the World Trade Organization’s GATS.
As of 2010, the EU Services Directive will remove many barriers facing trade in services. In effect, this will make it easier for service businesses established in member states to trade within the EU.
Overseas regulations and taxes when supplying services internationally
If you supply a service in a foreign country, you must comply with local regulations. For example, it might be illegal for you to provide legal or financial advice unless you have certain professional qualifications.
Before selling your service overseas, you may want to take action to protect your intellectual property there.
If self-employed individuals or employees are travelling overseas to work, they may need a visa and work permit. While they are in the country, they will be subject to local laws and taxes. To find out more, contact the embassy of the country concerned. Find foreign embassies in the UK on the Foreign & Commonwealth Office (FCO) website.
You can also find travel advice on the FCO website.
Your business is more likely to be subject to local regulations if you have a permanent presence, such as a representative office.
Local employment regulations apply to any employees you have working overseas. Local regulations also apply to any agents or other local partners you work with.
You may be liable to overseas taxes on income from service exports if you receive the income in that country or have a presence there. Some countries also restrict your ability to repatriate income to the UK.
Overseas regulations and taxes can be a very complex area. Market research is a good starting point. If you are in any doubt, you should take advice from an accountant, lawyer or professional adviser with local expertise before committing yourself.
International services and intellectual property
Intellectual property can be an important part of what you have to offer, helping you stand out from the competition. For many services, a good reputation and a strong brand name is crucial to winning new customers.
If your business relies on its intellectual property, you may have already taken steps to protect it in the UK. But this may not protect you overseas. UK trade mark registration and patents only cover the UK. Copyright material is automatically protected in many countries.
If you think you can profit from selling your services overseas, it’s worth ensuring that you have the right intellectual property protection.
You may be able to exploit your intellectual property overseas even if you have limited time and resources. For example, you could licence your intellectual property to an overseas partner. Instead of selling your own services, you receive a fee for letting your partner provide services using your intellectual property, eg trading using your brand name.
If you are going to do this, you need a clear agreement covering issues such as what rights they have to use your intellectual property, who will own any modifications, and what payments you receive. You should take professional advice from an intellectual property lawyer with international experience.
Payment for international trade in services
Before buying or supplying services, you should make sure you have a clear agreement on payment arrangements.
Key issues to consider include:
- how much will be paid, in what currency, and when
- who is responsible for bank charges
- what will happen if the customer fails to pay
- where payment will be made, eg to your UK bank account
- who is responsible for any taxes
When supplying services overseas, the risk of non-payment may be high. You cannot protect yourself with payment methods such as documentary collections that are used to reduce the risks when exporting goods. It can also be difficult to prove that you provided the services, and expensive or impossible to recover unpaid debts through the local courts.
As a minimum, it’s worth researching your customer to help assess how creditworthy they are. In some cases, you may want to get credit insurance to help protect you in case of non-payment. See the guide on insurance for international trade. You may decide not to deal with risky customers unless they agree to pay in advance.
If you will be providing services over a period of time, it can be a good idea to agree stage payments as the work progresses. This helps reduce the risk and improve your cashflow.
You should be aware that some countries have restrictions on using foreign currencies or transferring money overseas. You should check this in advance and take advice if necessary.
UK-based services exporters may also benefit from the commitments of UK trading partners under the World Trade Organization’s GATS.
For more information, see the guide on getting paid when selling overseas.
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