Customs expert Arne Mielken discusses the issues facing UK businesses as the country prepares to depart the European Union ‘ deal or no deal.
I write this feature uncertain about the exact details of the UK’s departure from the European Union (EU). With 11th hour talks on-going over a number of issues, and with a particular sticking point being fishing rights, it is still not clear what the final deal will look like. And it is also quite possible that the two sides won’t be able to salvage a deal anyway. Prime Minister Boris Johnson, the European Commission’s President Ursula Von Der Leyen and EU negotiator Michel Barnier are all burning the midnight oil in an attempt to forge some sort of agreement.
But whatever happens, one thing is certain: The amount of red tape, along with a number of new rules and regulations, will be vastly increased from what we have now. For business owners importing goods into the United Kingdom from the 27 EU member states, it is vital that administrative costs are minimised as much as possible. The fundamental question that all UK businesses now need to answer is this: Where is the product from? This determines what needs to be paid on customs duty and import VAT.
The bad news first: More red tape is unavoidable
Trading with the EU outside of its structure has more disadvantages, and a greater burden, than if trading inside the Single Market and Customs Union. Regardless of the outcome of negotiations, as of January 1st, 2021, the UK will be treated as a third country trading with the EU ‘ and vice versa. Legally speaking, there will be two customs unions from 2021: First, there is the customs territory of the United Kingdom. This comprises England, Scotland, Wales and Northern Ireland, including the Channel Islands and the Isle of Man. Secondly, there is the European Union with 27 member states, which forms the EU Customs Union.. Second, there are the Channel Islands and the Isle of Man. The European Union involves 27 member states and this means the following:
- Businesses face the prospects of border formalities, customs controls and checks at EU and UK ports, as goods move from one territory to another.
- Import formalities apply to goods entering a customs territory, including goods in transit.
- Export formalities, including a pre-departure declaration, will apply to goods exiting a territory. Once again, this involves goods in transit.
Get ready for more paperwork and warn customers about possible delays
Businesses wishing to trade with another trading zone will face additional paperwork, as well as the possibilities of new duties, tariffs and controls.
In particular, at the very least, we can expect that:
- Customs declarations, including pre-arrival and pre-departure declarations, need to be inputted into several national systems.
- Licences, such as Health Certificates and proof of status of goods, may need to be presented at each border.
- Delays may occur at borders due to new procedures or the absence of correct paperwork, which in turn could create bottlenecks.
What can a Free Trade Agreement (FTA) do?
Businesses on both sides of the English Channel will be keen for some sort of FTA to be agreed between the UK and EU. This will mean zero tariffs and zero quotas, known as ‘preferential tariff treatment’ and provides significant relief for many businesses facing exorbitant costs due to the likelihood of tariffs being imposed in the event of a ‘no-deal’ Brexit.
However, these agreements also often include clauses on trade facilitation and rule-making, in areas such as investment, intellectual property, government procurement and technical standards etc. In the case of any EU-UK deal, this will focus on creating a level playing field to avoid one party undercutting the other. This will also need to apply to a fisheries deal, too.
How does a business benefit from zero duties and zero quotas?
To benefit from this, the terms of the FTA must be met. Preferences will only be allowed on goods which are imported from countries which have signed the agreement (UK and the EU’s 27 member states). This should not, for example, involve China or the United States. This means that customs authorities need to determine the origin, or economic nationality, of each product. This is done via ‘Rules of Origin’. These are set out in the Origin Protocol attached to the specific agreement between the EU and UK.
What are Rules of Origin?
Like any FTA, it is vital to distinguish between goods wholly obtained in the EU or UK, and goods ‘sufficiently transformed’ in either of these two trading areas. It is now the job of businesses to verify that the product they are exporting comes from the EU or UK, and arrives at the selected destination without being manipulated by another country. Obviously certain goods, such as food items, may have to be stored in a particular way by another country, in order for these products to reach their destination in a satisfactory condition. In short, specific rules need to be met and documents correctly completed to demonstrate that all regulations have been followed.
Goods wholly obtained in the UK or EU
These are goods that are exclusively produced and processed in the EU or UK, and do not involve materials from any other country. This includes plants, minerals or live animals.
Goods sufficiently transformed in the UK or EU
This refers to items which are made with materials from other countries or have been partially processed abroad. Any EU-UK agreement will need to contain a set of preferential rules of origin per-product, which defines if a product was sufficiently transformed in either the EU or UK. There are usually three groups of rules:
A) The ‘value added’ rule
You may discover a rule in which the value of all the materials used cannot exceed a certain percentage of the price of the product (price does not include additional costs such as transportation etc).
B) Change of tariff classification
There may be a rule that states you cannot have an item that has the same tariff classification as any of the non-originating materials used in the product.
C) Manufacture from certain products
You may also find a rule that permits you to use specific non-originating material in the manufacture of your product.
Please be aware that, in some cases, the rule may include any combination of A, B or C.
If you are unsure, and wish to know more about Rules of Origin, please contact: https://www.customsmanager.org/
A correctly completed and endorsed certificate of origin may need to be provided (called EUR1 Movement Certificate in the EU) to support claims for preferential or zero rates. There are simplifications available, which are subject to authorisation.
What to do if you’re not sure about origin?
Businesses can request a Binding Origin Information (BOI) statement which is a written decision regarding preferential goods. A BOI is a EU wide system which allows you to obtain a decision from an individual EU member state on the origin of your goods. Such decisions are legally binding and they are provided free of charge by customs authorities in the EU and UK.
Claiming preferential origin from the EU in 2021 will only be possible if the EU and UK sign a Free Trade Agreement. It is then up to businesses to claim their preferential trade status in order to benefit from zero duty and zero quotas. Rules of Origin must be fully understood and they are often very complex. But it’s vital to get a handle on these rules if businesses want to prove they are eligible for reducing costs.