Under the new free-trade deal between the EU and UK, which was completed just days before the end of Brexit transition period, tariff-free trade is based around the concept of the rules of origin.
Under the new free trade agreement, tariffs will not be charged where a business can demonstrate that goods meet these rules and are predominantly of UK origin.
The simplest way to think about the rules of origin is to give goods being imported and exported an ‘economic nationality’. This determines where they have been produced or manufactured, not just where they have been shipped or bought from.
There are two different types of Rules of Origin, preferential and non-preferential. Under the free trade agreement (FTA) the former applies, meaning that the UK and the EU have agreed to remove tariffs for each other’s goods.
UK goods seeking to enter the EU under this preference have to prove that they are from the UK under particular rules agreed in the FTA. This prevents a country without a trade deal from accessing the EU market through the UK and vice versa.
Generally speaking, the free trade agreement says that goods must be locally sourced, or must have had sufficient work carried out on them in the UK.
However, already we have seen some conflict with items such as Marks and Spencer’s famous Percy Pig sweets, which have seen tariffs placed upon them because despite being packaged and developed in the UK the products themselves are produced in Germany.
This matter is in fact far more complicated than this. How it applies to each sector or to each individual item exported and imported between the EU and UK varies and this only becomes more complicated when you consider more complex manufactured items.
The complexity of supply chains can mean that proof of origin can be difficult for traders to supply and hard for authorities to assess.
The first step for a business is to determine what good is being traded. The World Customs Organization has a list classifying every product traded under tariff headings. Each product has a unique code which is grouped into broader categories.
Once the good is classified, the next step is to establish its ‘economic nationality’ as opposed to simply the country it came from. This involves determining the good’s value and where the contributions were made in adding value to the final product.
If all materials were obtained and processed in one state, it would be ‘wholly obtained’ in that country. That would apply, for example, to agricultural produce, raw materials and natural resources.
But consider for a moment a car. It may be made up of thousands of individual components down to individual bolts and bulbs, each of which comes from a different supplier from around the world.
With multiple components adding value, it can be very difficult to determine origin for some products. In this case, the final product is determined by the location of the “last substantial transformation.”
For preferential origin such as the EU-UK relies on, substantial transformation is defined through one or a combination of three main criteria:
- Change of tariff classification
- Sufficient value-added
- Specific processing
The precise rules are very detailed and can change for each product depending on what is agreed in the FTA. Typically, for preferential origin such as is found in the new FTA, more than 50 per cent of value has to be added to claim origin, but it differs for each classification of goods.
From 1 January 2021, in order for businesses to benefit from preferential tariffs when importing into the UK or EU, they must claim preference on their customs declaration and declare they hold proof that the goods meet the rules of origin.
This can take the form of a statement of origin completed by the exporter on a commercial document, or knowledge obtained and held by the importer that the goods are originating in the UK.
The UK and EU have agreed to a 12-month grace period. This means that until 31 December 2021, businesses do not need supplier’s declarations from business suppliers in place when the goods are exported but they must be confident that the goods do meet the preferential rules of origin. Businesses may be asked to retrospectively provide a supplier’s declaration after this date.
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