UK trade deal is great news – but watch out for tax complications

Murray Brewer
insight featured image
Fantastic news on the horizon for Kiwi exporters, as the UK/NZ Free Trade Agreement will likely be ratified later this year, removing tariffs from 99.5% of our current trade into the UK.

Wine and honey, for instance, will have all tariffs removed immediately, and mussels and apples will have an immediate reduced tariff which will phase out over two years. Butter and cheese will be tariff-free after five years; beef and lamb will be freely accessible after 15 years. 

The financial benefits will be huge: our UK wine exports alone are valued at around $500 million a year, and we pay $14 million in tariffs. That money will now be retained almost entirely in our economy. The value of our exports to the UK is forecast to grow by 50% after the tariffs are removed, according to the Minister for Trade and Export Growth.  

There are benefits to service industries, too. It has become easier to work in the UK, with a more flexible approach to visas and an extended age limit (35, up from 28). Our two nations are also moving toward mutual recognition of professional qualifications, such as Chartered Accountants. That’s a welcome move toward a more modern and streamlined approach, in a world where people often relocate or work remotely for offshore businesses. 

Dip your toe in – then set up the right structure 

The free trade agreement is an exciting opportunity, but don’t go in all guns blazing. I’ve seen companies advised to ‘future proof’ themselves by setting up local companies, only to have their products fail to sell. They burn an enormous amount of cash and it can be pretty heart-breaking. 

My clients have had success by initially dipping a toe into overseas markets, without spending a lot of money or incurring tax obligations. Then, we work together to set up an effective structure for the future. 

It might start with attending a trade show, making some sales and establishing contact with local agents. They might opt for a direct shipping model, or third-party distribution set-up. Once the brand becomes successful in the UK, they can then start thinking about taking a bigger slice of the pie. Maybe one day that means buying a warehouse, employing managers and hiring a dozen sales reps to cover half of Europe. Any sizeable set-up is much more likely to succeed if you already have reliable revenue and a growing market share in place. 

Ship direct, use a sales agency, or set up shop in the UK? 

With a little forethought, you can set yourself up to maximise your trade profits in the UK. The lack of tariffs will make UK sales more profitable, and it removes one of the barriers to entry into the UK market. 

From a tax and operational perspective, exporters will need to find a balance between control and cost. At one end of the continuum, you could ship your product directly from Aotearoa to a UK consumer. You’ll have a relatively simple tax treatment and keep complete control over your brand. However, the cost of shipping individual packages to the UK may be prohibitive, and you’re going to need to deal directly with customers, their complaints, returns and missing items. That can be a serious headache. 

You might prefer to set up a UK warehousing arrangement. Let’s say a premium Kiwi winemaker wants to sell more bottles into the UK. They could ship to a UK warehouse and use a sales agency. The agency would market and sell the wine throughout the UK, taking a larger chunk of the profits. The winemaker gives up some control of their brand, but the sales agency deals with most of the logistics, marketing, sales costs and customer service, so the cost and risk to the exporter is relatively low. 

Alternatively, the winemaker might sell to a single buyer/distributor, which is also relatively inexpensive but there’s some loss of brand control. Or they could set up their own base of distribution, with its own marketing arm – much more costly but potentially a way to build a powerful brand selling at a premium to targeted clients. 

Finally, the winemaker might establish a London office or branch to help them capitalise on the UK market and possibly sell into the EU. They retain full control of the brand and the profits, but it is costly and somewhat risky. With tariffs removed, this approach may now make more financial sense for certain businesses.   

The tax angle: avoid the traps

There are a few tax traps which could catch you out if you don’t pay close attention to how you set up and operate your export business. 

For example, if you set up a UK office, you might be tempted to say it only made $10.50 in the financial year, while your New Zealand business made $10 million. That would allow you to pay all your tax here and get a 28% tax credit to attach to your dividends. However, because of global transfer pricing rules, that’s unlikely to be an acceptable strategy. HM Revenue & Customs (their equivalent of Inland Revenue) will seek to attribute a good lump of your profits to your UK branch. If you try to leak too much profit back to New Zealand, you may find yourself being double taxed on some of that revenue. 

If you’re operating with a lighter footprint, just using key people to travel to the UK occasionally and set up agreements with local agents, you may assume that your business has no tax presence in the UK. But be careful – if you or another key employee stay in the UK for too long, or you enter into significant contracts while you’re there, you may trigger a tax presence. HMRC may deem your business to be permanently established, leaving you with complex tax filing requirements that are a major drag on your time. These aren’t the only tax traps, but they illustrate why it’s vital to get the right advice before you make your move. 

This free trade agreement is a massive market opportunity for Kiwi businesses. By dipping a toe into the water, then setting up a structure when you know the market better, you’re giving your business the best possible chance of success – and profits.