Rules of Origin for UK/EU Trade
28 January 2021
BEAMA members enjoyed an expert session with BEIS Rules of Origin negotiator Rhys Isaac at our all-member meeting on 27th January. Following on from that and other detailed reviews with Government, BEAMA Legal & Trade Director Andrew Willman has produced this Guidance document on how Rule of Origin work in UK-EU exports and imports. We continue to develop tailored guidance for BEAMA members on this and other key trade issues with our Government colleagues.
Rules of Origin
Free Trade Agreements (FTAs) provide for preferential tariffs to apply between the FTA parties to allow their national manufacturers to avoid paying the WTO Most-Favoured Nation
(MFN) tariffs that would otherwise apply. To prevent this benefit being unfairly used for thirdcountry products, strict Rules of Origin (RoO) are included to determine whether the products involved have either had sufficient manufacturing done in the home country or have enough home-sourced content of materials and components. Usually, materials or manufacturing from either of the FTA parties will count as ‘home’ content for this purpose.
HS Codes
To determine which rule applies to individual product types, these are all assigned Harmonised System (HS) Codes, for BEAMA products these usually start with 84 (mechanical)
or 85 (electrical/electronic). The codes get longer as they describe more specific products or components to 4-, 6-, 8- or 10-digit level. BEAMA members overwhelmingly report that they know the correct codes for their products, which are also used for a number of taxation, accounting and statistical purposes and known as Commodity or SIC Codes. Government Guidance on how to find and use the codes is here: https://www.gov.uk/guidance/findingcommodity-codes-for-imports-or-exports
TCA
The FTA between the UK and EU is known as the Trade & Cooperation Agreement (TCA) and applies zero-tariffs for qualifying goods. For most BEAMA products the RoO is described as
CTH or 50% NOM. This means that there is either:
1. sufficient UK or EU manufacturing to cause a Change in Tariff Heading, e.g. by taking a number of components and materials and transforming them into a finished product; or
2. no more than 50% of Non-Originating Materials, e.g. half or more of the components and materials used are sourced in the UK or EU.
For option 1, the Tariff Heading is a 4-digit level and normally the finished product will be at that level, with essential components being coded at a 6- or 8-digit level below that.Occasionally this cause problems where the 4-digit code includes components but usually where this is a risk the RoO are changed to CTSH or Change in Tariff Sub-Heading.
For option 2, the calculation of 50% is based on the value of the materials and components compared to the finished products ex-works price and so the labour and manufacturing costs 28th January 2021
may make up a large proportion of the total percentage. Care may be needed to check the origin of materials that are bought from a UK supplier are not of non-UK or EU origin.
Products will usually have a Bill of Materials (BOM) for internal costing so in most cases this can be used for an initial calculation under Option 2.
You can choose whichever of Option 1 or 2 will lead to your product qualifying under the RoO although a few products will require CTH and 50% NOM under the TCA.
Tariffs
Calculating and claiming zero-tariffs does involve some administrative work so it is advisable to check what tariff would apply under the WTO MFN system. For imports into the UK this is the UK Global Tariff https://www.trade-tariff.service.gov.uk/sections and for imports into the EU, or into Northern Ireland where there is a risk of onward sale to the EU, it is the EU Common External Tariff https://www.trade-tariff.service.gov.uk/xi/sections. In some cases, the UK has reduced global tariffs to zero anyway so make sure that is financially worthwhile to go through the full RoO process.
Cumulation
The TCA provide for full bilateral cumulation between UK and EU so products, components or materials from both UK and EU ‘count’ for RoO. No other countries are included in this, even where they have FTAs with both the UK and EU, such as Japan. In addition, imports from developing countries with zero-tariff access to the UK and EU markets under the Generalised System of Preferences (GSP) do not have this cumulation and so will be liable for tariffs if sold on or making up more than 50% of a product’s value.
Insufficient Processing
It was always clear that after Brexit, imports from outside of the UK and EU that were then sold on into the EU (e.g. China-UK-Ireland) would be subject to ‘double duty’ and for tariffs on arrival both in the UK and in the EU. In addition, under normal FTA practices, an import from the EU into the UK that is then sold back into the EU (e.g. Germany-UK-Ireland) will also be liable for tariffs on the final import into the EU. This is because goods that have ‘insufficient processing’ and are distributed on without any changes or subject only to re-packaging or simple finishing lose their original EU status but also are not classed as having been produced in the UK and so don’t qualify under the RoO.
In these situations, manufacturers may have to investigate routing distribution without going through the UK or using methods such as bonded warehouses to ensure the goods do not pass UK Customs. Extra costs and guarantees may be involved in such methods.
RoO Declarations
To claim preferential tariff status under RoO, some form of declaration is required and for some FTA countries this will need some external certification or verification process, such as is offered by UK Chambers of Commerce. Under the TCA, this is all based on self-certification and either the manufacturer makes a Supplier’s Declaration that the products meet the RoO
or this is done by the Importer’s Knowledge. The full detail of the product’s qualifying basis does not need to be provided to Customs authorities and until the end of 2021 it does not need to be immediately available. From 2022 onwards there is a possibility that Customs authorities could require production of evidence that the goods meet the RoO. Further information, including a template Statement on Origin is here: https://www.gov.uk/government/publications/rules-of-origin-for-goods-moving-between-the-uk-and-eu
Incoterms
The responsibility for dealing with Customs declarations and paying import duties and tariffs typically lies with the importer. Manufacturers and suppliers may now find that their customers will seek to shift this responsibility to them by changing the Incoterms that govern the contract.
For example, if the export contract is on FOB incoterms, the seller bears costs and risks only until the goods are on board the designated ship/vessel for transport. On DAP terms the seller’s obligations stop on arrival at the names port or place of destination, with customs clearance, duties and taxes being the buyer’s responsibility
Some customers will now look to use DDP (Delivered Duty Paid) terms, making the seller responsible for all clearances, duties and any associated costs. As always, this is a matter for negotiation but clearly will increase the potential liabilities and costs of the Seller.
Further Guidance
Issues of RoO are generally product specific so providing a general explanation that answers all points is challenging. BEAMA is seeking to develop more user-friendly and scenario-based guidance in collaboration with BEIS and UK Government. For any individual queries, please email [email protected]
Andrew Willman
BEAMA Director of Legal, Trade, Economic & Finance
