How can UK businesses legally handle the sale of goods under consignment agreements?

11 June 2024

Today, as UK businesses increasingly look for ways to reach new markets and customers, consignment agreements have become a popular strategy. This method facilitates the sale of goods without the immediate need for payment, creating a win-win situation for both the seller and the buyer. But with this approach, you must understand the rules and regulations that govern its execution. This article aims to provide a comprehensive guide to navigating the sale of goods under consignment agreements legally.

Understanding Consignment Agreements

A consignment agreement is a contractual arrangement between a seller (consignor) and a buyer (consignee), which allows the consignee to sell goods owned by the consignor. The ownership of the goods stays with the consignor until the goods are sold. When the sale occurs, the consignor is paid an agreed-upon amount, while the consignee keeps the rest.

Understandably, it might seem a bit complex, but it's a practical business model that can be immensely beneficial. However, to ensure you're operating within the confines of the law, it's crucial to understand the specific rules and obligations under this agreement.

Legal and Customs Obligations

When goods are imported into the UK under a consignment agreement, they are subject to customs duties and VAT. The consignee is often responsible for clearing the goods through customs, and they are required to provide a customs declaration. This document details the goods' nature, quantity, and value.

The consignee will be liable for any import duties and VAT charges. It's essential to factor this into your pricing strategies to avoid any unwelcome financial surprises. Payment of these charges is typically made at the point of import, and failure to observe these obligations can result in severe penalties, including fines and seizure of the goods.

Consignment Agreement Terms

The terms of a consignment agreement play a key role in defining the rights, responsibilities, and obligations of both parties. Among other things, it should explicitly state the terms of payment, the responsibilities regarding import duty and VAT, and the procedures for handling unsold or returned goods.

Another crucial aspect is a clear definition of the relationship between the consignee and consignor. This is to ensure that it does not inadvertently create an employment relationship, which could have significant legal and tax implications.

The contractual agreement should also include comprehensive 'force majeure' clauses to protect both parties from unforeseen circumstances that could affect the sale, such as geopolitical events or natural disasters.

Price Considerations

Setting the price under a consignment agreement can be tricky, especially when import duties and VATs are involved. Typically, the sale price is determined based on the consignor's cost price plus a mark-up. This mark-up is often a percentage of the cost price and should be sufficient to cover the costs of import duties and VAT, as well as leave a profit margin for the consignee.

It's crucial to remember that the ultimate selling price should also be competitive and align with market norms. Overpricing can lead to unsold stock, which can be costly for the consignee, as they may have to store, insure, and eventually return the unsold goods to the consignor.

International Trade Rules

Aside from domestic regulations, businesses engaged in such agreements should also be aware of international trade rules. Each country has its own rules concerning imported goods, and not understanding these rules can result in fines, seized goods, or even legal action.

For instance, certain countries have specific labeling requirements for imported goods. Others may have stringent rules regarding the import of certain types of goods. It's therefore essential to familiarise yourself with these rules to ensure smooth trading operations.

In summary, while consignment agreements can offer UK businesses an effective route to broaden their customer base and increase sales, they need to be managed with due diligence. Understanding the legal and customs obligations, defining clear agreement terms, considering the right pricing strategies, and adhering to international trade rules are all essential components of successfully and legally handling the sale of goods under consignment agreements.

Pricing and Profit from Consignment Agreements

When it comes to consignment agreements, pricing and profit are two crucial aspects that businesses need to consider. The price of the goods sold under a consignment agreement is typically determined by the consignor's cost price plus a mark-up. This mark-up usually includes the costs incurred through import duties and VAT, and it should also leave a sufficient profit margin for the consignee.

Specifically, the ultimate selling price needs to be competitive with the current market for similar products. This aspect is critical to avoiding an overstock of unsold goods, which can be costly for the consignee. Remember that unsold goods may need to be stored, insured, and may eventually need to be returned to the consignor.

In terms of profit, the consignee generally receives a commission on the invoice price of the goods sold. This commission, agreed upon in the consignment agreement, is essentially a percentage of the sale price. It's important to note that the consignee only receives this commission after the goods have been sold.

Another key factor is the EORI number. In the UK, any business involved in the import or export of goods with non-EC countries must have an EORI number. This is a unique ID code used to track and register customs information in the EU.

In conclusion, to ensure a profitable consignment agreement, businesses must consider the cost price, import VAT, customs duty, and the need to set a competitive selling price. Additionally, securing an EORI number is necessary for the legal sale of goods to non-EC countries.

Free Circulation and Member State Regulations

The concept of free circulation is a relevant aspect of consignment agreements within the European Union (EU). Once goods have been imported into an EU member state and all the import formalities have been completed, and import duties paid, they are considered to be in free circulation. This means they can move freely between member states without being subject to additional customs duties.

However, it's also crucial to remember that each member state may have its own regulations for imported goods. For instance, some countries may have specific labelling requirements for imported goods, while others may have strict rules regarding the import of certain goods types.

In the United Kingdom, for example, businesses in Northern Ireland follow a different set of rules compared to the rest of the UK due to the Northern Ireland Protocol. Therefore, those exporting to Northern Ireland may need to comply with additional EU customs rules.

Understanding these regulations is critical to avoid surprises and to ensure smooth operations. Businesses engaging in consignment sales should familiarise themselves with the specific regulations of the member state they are dealing with.

Conclusion

Consignment agreements offer an enticing avenue for UK businesses to expand their market reach. Yet, the intricacies of such agreements mean careful attention must be given to the legal and customs obligations, pricing considerations, and the specific regulations of the member states involved. Whether it's understanding the concept of free circulation, ensuring all duties are paid for the goods to enter the market legally, or setting a competitive and profitable selling price, each aspect plays a critical role in a successful and lawful consignment agreement.

Being cognizant of the specific rules and regulations, whether domestic or international, and having a comprehensive consignment agreement that outlines clear terms for both parties, will help ensure that your business can thrive in new markets and navigate the world of consignment sales effectively and legally.