Globalisation creates complexity. So unsurprisingly, it comes packaged with a load of confusing jargon.
You should nail down these critical technical terms if you’re starting as an exporter in the global market.
To soften the learning curve, we’ve selected seven key business terms that every UK-based global exporter should know to help them on their exporting journey.
This article at a glance
We cover all the key terms for exporters — from hidden costs to tax and payment terms.
What is COGS?
Cost of goods sold (COGS) refers to the total cost incurred by your business in producing goods or services. You might hear COGS referred to as cost of sales or cost of services.
There are two types of costs – direct and indirect.
Direct costs are straightforward – costs tied to a specific product, service or activity, such as material or labour costs. On the other hand, indirect costs cannot be tied to an object, from utility costs to rent.
Why is knowing your COGS important?
In short, to maintain a healthy profit margin – to ensure your product is valued correctly. Otherwise, you might find yourself spending too much on the production of goods.
Lower taxes is another benefit. COGS is a business expense, so it’s tax-deductible. While high COGS can mean you’ll be liable for lower taxes, it can also mean that your business is losing profit.
You only need to consider the direct costs your business incurs. Here’s a simple formula:
Beginning inventory + additional inventory – ending inventory
= costs of goods sold (COGS)
Beginning inventory is the cost of the existing inventory – like products and materials brought forward from the previous period.
Additional inventory refers to the cost of the inventory you purchased in the current period (including labour costs, materials, overheads, rent, and others).
Ending inventory is the cost of inventory your company has left at the end of the period, which should be deductible after adding your beginning and additional inventory.
2. P45 versus P60
HMRC requires businesses to fill out employee tax forms – P45 and P60.
What is a P45?
The P45 form is what your employee should get when they’re leaving their job. Employers are legally obliged to provide it regardless of whether your employee has quit, been laid off or retired.
The P45 shows the annual tax and National Insurance you’ve paid on behalf of your employee until their leaving date.
What is a P60?
The P60 is a legally required form handed out to your employees at the end of every UK tax year – a summary of their pay and tax for the whole tax year (6 April to 5 April). Employers need to issue themselves a P60.
You don’t need to keep your ex-employees' P60 forms, but you must keep copies of your current employees’ forms for up to three years.
3. Sort Code
Sort codes contain three pairs of numbers (XX-XX-XX). The first two numbers identify the bank, the next two refer to the branch, and the last two, the location.
Why do we need a sort code?
Sort codes ensure that money is sent to the correct account – not someone else’s.
You can always find it behind your bank-issued cards, bank statements, letters from your bank, or on a mobile banking app.
4. Routing Number
American banks commonly use bank routing numbers (BRN) – a nine-digit number assigned to each financial institution in the US.
The routing number ensures that your money goes into your account – not anyone else’s. Larger banks usually have multiple routing numbers, so you must ensure that your routing number matches the state in which the respective account was opened. Smaller banks usually only have one bank routing number.
You don’t need a routing number to make SWIFT payments. If you want to make a SWIFT payment to an account in the US, all you need is the SWIFT code and the account number.
5. CHAPS versus BACS
There are two commonly-used domestic bank payment systems in the UK – CHAPS and BACS payments.
What is CHAPS bank transfer?
The Clearing House Automated Payment System, or CHAPS, is a same-day bank-to-bank transfer method usually used for high-value or time-critical transactions.
Merchants or business owners making a large (over £10,000) one-off payment use CHAPS. Transactions are expensive at £25–£35, depending on your bank, so you shouldn’t choose CHAPS if you’re making a day-to-day payment – it wouldn’t be worth it.
The time taken to clear a CHAPS bank transfer takes a few hours, and the recipient should receive the payment on the day – if made before 3 pm.
What is a BACS payment?
BACS (Bankers’ Automated Clearing Services) is the most commonly-used UK bank-to-bank payment system. It’s usually free, though sometimes 25p per transaction.
Low-value transfers use BACS, although it has one downside – the processing takes up to three days. Don’t use BACS if you’re making an urgent transfer to your suppliers or customers.
6. Pro Rata
Labour costs can be high – sometimes up to 70% of your total business costs. That’s why hiring a part-time employee is useful – it allows you to calculate their pay on a pro-rata basis.
What is pro rata salary?
A part-time employee with prorated pay will receive a salary depending on the number of hours they work, unlike a full-time employee.
If you only need an employee to work between 7 am - 10 am, you could hire a part-time worker for that period, paying £20 per hour.
7. VAT Threshold
You’re legally required to register for Value-Added Tax (VAT) with HMRC if your annual turnover exceeds a certain threshold. Failing to register can lead to crippling penalties.
Who is required to register for VAT?
The UK VAT threshold is £85,000 until 31 March 2024.
What does this mean? Businesses with an annual turnover of over £85,000 or expecting to exceed £85,000 over the next 30 days must register for VAT.
If you meet all the following criteria, you must register for VAT no matter how much your business makes:
- The owner lives outside the UK
- The owner’s business operates outside the UK
- The business supplies (or expects to supply) any goods or services to the UK
How do you register for VAT?
You can register online for VAT on this website.
What do you do after registering for VAT?
You’ll need to:
- Charge VAT on the items you sell to customers
- Pay VAT on items you buy for your business
- Submit VAT returns to HMRC
- Make sure your VAT records are always accurate and up-to-date
How to charge VAT?
The UK VAT rate differs from product to product.
- Most goods and services: standard rate of 20%
- Items such as children’s car seats and energy products: reduced rate of 5%
- Zero VAT rate: health products, books and newspapers
Unsure? Check out this guide on the different products that charge different VAT rates.
International trade payments do not have to be difficult
There’s a lot of jargon in international trade. It can be confusing for first-time merchants. Make things a little simpler with Silverbird.
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Author: Silverbird Content Team
Illustration: Kate Faldina