Brexit “Myth-Busting”- Trade Friction And Possible Unexpected VAT And Customs Costs

Now that the ink is drying on the UK/EU Trade and Cooperation Agreement, it is clear that the lauded “zero tariffs, zero quotas” headline is not all it seems. A significant omission from the headline is that zero tariffs and quotas are available only for eligible goods.

The 1246 page agreement contains specific rules of origin that must be fulfilled to achieve the headline benefits. This means that goods must “originate” in either the UK or the EU to qualify for preference. Goods that are wholly produced – i.e., grown, fished, farmed, or mined, are fine – they will qualify as originating; however, manufactured goods have stringent rules to meet. It is not as simple as having one rule covering all manufactured goods; there are different rules in place for various goods, making it essential to determine the correct commodity code for the manufactured product as a starting point. The commodity code determines which rule of origin is applicable. For some products, a manufacturing process that adds a specified percentage of local value may be sufficient. Some products allow a maximum level of non-originating content, e.g., 45/50/70% of the ex-works selling price (the level varies from product to product). Others require that any non-originating materials must be from a different tariff heading than the manufactured product, sometimes with, and sometimes without a tolerance level for inclusion of non-originating materials.

It is not enough to assume that added value will confer UK origin. If the applicable rule requires a change in tariff heading, added value can only confer origin if the value of non-originating materials of the same tariff heading is within a tolerance of 10% of the ex-works selling price.

There are also minimum processing requirements, whereby a manufacturing activity must have sufficient processing levels and conform to the strict origin rules for the relevant commodity code.

Another point businesses should be aware of is that when goods are exported from a customs territory, they lose their economic origin status. For example, this means that shoes originating in Portugal will lose their EU preferential origin status when they are exported to the UK. If they are subsequently shipped to Ireland, they will a) not have EU origin status, and b) not have UK origin status as they have not been processed in the UK; they will be subject to full EU duty charges on the shipment into Ireland.

Evidence that goods meet the rules of origin must be maintained – this may mean obtaining legal declarations from suppliers that their components originate, which can be an onerous commitment for products manufactured from a complex bill of materials. If the proportion of non-originating materials for a manufactured product is close to the allowable tolerance, a small change in supplier pricing or even a fluctuation in the currency exchange rate can disqualify the manufactured product’s originating status. While the UK offers a 12 month grace period on the requirement to hold evidence at the time of shipment, the EU has so far remained silent.

The customs duty origin and classification rules are complex and, as duty is irrecoverable, significant unexpected costs can arise if mistakes are made. The UK/EU trade deal has been widely publicized as providing for zero-tariffs on UK/EU trade, and while this may be the case for some, it won’t be the case for all, as eligibility criteria has to be met.