As of 24th December 2020, the UK and EU agreed upon provisional terms for their future cooperation to apply from 1st January 2021 until 30th April 2021. This Trade and Cooperation Agreement (“TCA”) provides businesses with tariff and quota free trade in goods between the two trading blocks. However, one particular caveat is that the goods being imported/exported must have originated within the UK or EU.
To export tariff-free under the TCA, goods must meet the UK-EU preferential rules of origin. This means that there must be a qualifying level of processing in the country of export to access zero tariffs. This applies to EU origin goods imported and moving through the UK from an EU member state to another EU member state, as well as goods imported from a third country (i.e. those apart from the UK and EU member states).
Rules of origin are commonplace in any free trade agreement and in this case are detailed within around 50 pages contained within the TCA; they set out in detail rules to determine whether goods originate from the UK/ EU or not. These rules of origin relate to goods economic nationality, as opposed to the point from which it has been exported and are fundamentally in place to ensure that preferential tariffs are only given to goods that originate in the UK or EU and not from third countries. For example, where goods originate from a third country with inadequate labour protections standards, they are prevented from entering the UK or EU trade area which otherwise could cause issues in regard to competition.
Factors which determine whether goods will pass the rules of origin include number of countries in which production takes place, the complexity of the goods being produced and the quantities of components (or inputs) which the goods incorporate. Manufacturers will need to be able to evidence where all the inputs of their goods originate from and complications often arise where a good is fundamentally produced in the UK or EU but still contain inputs which have originated elsewhere, for example in the case of car manufacturing where certain inputs may originate from a third country. Currently, these complications are providing difficult for many businesses as features within their production process are potentially preventing them from benefitting from tariff-free trade under the TCA.
So what does the TCA say?
The detailed specifics or the rules of origin are set out in Chapter 2 of the TCA which specify general requirements but also product-specific provisions which are the specific rules that set out what the requirements are for that product to be considered ‘originating’. The term ‘originating’ is important here as goods attain this status if they are either ‘wholly obtained’ or ‘sufficiently worked or processed’, which we will look at further in this article.
The General Requirements (Article ORIG 3, Section 1, Chapter 2, TCA) set out that the following types of goods will satisfy the originating rules:
- goods wholly obtained in the UK or EU. This includes specific circumstances of where goods are deemed to have been ‘wholly obtained’, for example, agricultural and aquacultural goods which have been exclusively grown/sourced in the UK or EU.
The important thing to note here is that such goods have been exclusively obtained or produced in the territory of one country within the UK or EU, without using materials from any other country. The goods must not have been manipulated or changed in another country, apart from certain minimal processes to keep them in good condition;
- goods produced in the UK or EU exclusively from originating materials from the UK or EU; and
- goods produced in the UK or EU incorporating non-originating materials provided they satisfy the ‘Product-specific rules of origin’ requirements.
Once a product has attained an ‘originating status’, it is considered 100% originating, which means that if you were to incorporate it into the production of another product, its full value is considered originating and no account is taken of non-originating materials within it. A good example is where a UK-manufactured engine contains 30% non-originating content but meets its rule of origin, if that engine is used in the production of a car in the UK or EU, 100% of the value of that engine can be counted towards the originating content of the car.
What does this mean in practical terms?
In order for businesses to benefit from the preferential tariffs under the TCA when importing into the UK or EU, they will need to claim preference on their customs declaration and declare that they hold proof that their goods meet the rules of origin.
This proof can take the form of either:
- a statement on origin completed by the exporter on a commercial document; or
- knowledge obtained and held by the importer than the goods are ‘originating’.
UK Government guidance sets out in each case where:
You are an importer that you must:
- Have proof of the originating status of the product before claiming preference. This may be either:
- a Statement on origin provided by the exporter on a commercial invoice or other commercial document that describes the goods. The text of the Statement would be included in the agreement. This is known as an invoice or origin declaration.
- supporting documents and records if you are claiming preference using your ‘importers knowledge’. If using importer knowledge, you must obtain sufficient evidence that the goods qualify as originating. This may involve the exporter providing a range of supporting documentation. If you cannot obtain that evidence, then the exporter may be able to provide a Statement on origin;
2. Claim for preference by completing the relevant part and declaring the proof of origin on your customs import declaration;
3. If requested by the customs authorities, provide the proof of origin to the customs authorities; and
4. Maintain records for at least 4 years.
A step by step guide to importing is provided here.
If you are an exporter that you must:
- Hold evidence that the goods meet the relevant rules of origin before issuing a Statement on origin;
- Determine whether a declaration from your supplier needs to be obtained. For UK-EU trade, until 31 December 2021, businesses do not need supplier’s declarations from business suppliers in place when the goods are exported. Businesses may be asked to retrospectively provide a supplier’s declaration after this date;
- Provide the importer, with one of the following:
- a Statement on origin on a commercial invoice or other commercial document that describes the goods. The text of the Statement would be included in the agreement. This is known as an invoice or origin declaration.
- supporting documents and records if your customer is claiming preference using their ‘importers knowledge’; and
4. Maintain records for at least 4 years.
A step by step guide to exporting is provided here.
Further guidance is given here in regard to proving originating status and claiming preferential treatment.
Take-away points of action for businesses
Businesses seeking to import goods which would by default attract a positive rate of customs duty will need to determine whether their goods meet the rules of origin in the TCA.
- Importers will need to check that exporting suppliers understand the rules and provide evidence to support origin qualification. They will need to understand how to claim preference at import, to instruct their customs brokers accordingly and to keep records.
- Exporters will need to classify their goods, establish the origin rule applicable under the TCA, and then develop origin determination, calculation, certification and record-keeping processes. It should be noted that exporters will also be able to self-certify the origin of the goods, making it easier for businesses to prove the origin of their goods and reducing red tape.
The EU has outlined that businesses will benefit from additional flexibility in collecting documentary evidence during the provisional period covered by the TCA – allowing businesses greater time to obtain evidence of origin.
The above is nothing new for businesses who export outside of the UK. Following Brexit, businesses within the UK are now being exposed to the often painful experience of determining how these types of trade and customs rules apply to particular goods.
The way in which goods work their way across borders through varying production phases and supply chains can largely impact on whether goods are considered ‘originating’ or not – which ultimately decides whether businesses benefit from a TCA tariff free status. Bearing this in mind, businesses would do well to be conscious of how their respective production processes and supply chains operate in order to determine whether any part of their business operations should be adjusted in order to benefit from tariff exemptions. This being said, the complexity of completing the necessary paperwork does need to be reviewed. For example, often the time costs of completing burdensome forms may outweigh the benefit of avoiding the applicable tariff. Considering that tariff levels vary for different types of goods, it is worthwhile establishing the applicable charge in order to make a commercial decision.
UK businesses should take heed of the above and should certainly not assume that a zero tariff will be applied; change is always certain and this article hopefully outlines how this isn’t always simple.