What’s the breakdown for the rules of origin when exporting to the EU?

New Year’s Day 2021 saw the beginning of a new, post-Brexit relationship between the UK and the EU with the EU-UK Trade and Cooperation Agreement (TCA) provisionally coming into force.

A key feature of the TCA is a complete prohibition on customs duties and quotas on all goods traded between the UK and the EU – but only if it can be shown that the goods originate from the other region.
Contrary to how simple this may sound, a good’s origin is determined by the ‘rules of origin’. As a result of the complexity of these rules, UK businesses exporting goods to the EU are facing and will continue to face complications where the good is made using components produced or processed in a third-party country outside the UK and the EU.

It is therefore essential for UK exporters to the EU to have an understanding of these rules and to then evaluate their production operations to ensure compliance, should they wish to claim preferential tariff treatment. Where a good fails to meet its relevant ‘rule of origin’, it will be subject to the standard World Trade Organisation import tariffs; for UK exporters to the EU, the Common Customs Tariff of the EU will apply.

Each good traded under the TCA has a product-specific rule (PSR) to determine its ‘rule of origin’. These PSRs primarily include one or a combination of the following rules:

1. wholly obtained
2. change of tariff code; and
3. value or weight limit.

Each PSR is based on a good’s Harmonized System (HS) code. The HS, developed by the World Customs Organisation, is an internationally standardised system of description and numbers. It is used by customs authorities in over 200 countries to identify products for tariff purposes.

The “wholly obtained” rule requires that products are obtained entirely in the UK or EU without the addition of any non-originating materials from another region (NOMs). The TCA has an exhaustive list of products that are ‘wholly obtained’ and this primarily includes agricultural goods grown entirely in the UK or EU.

The “change of tariff code” rule states that for a good to be originating, it needs to contain NOMs with HS codes that are different to the HS code of the good itself. For example, the HS code for a television is 8528. Therefore, a television made using NOMs will only be originating if these NOMs are from a heading other than 8528. To demonstrate compliance with this rule, exporters will need to know the HS codes of their exported product and all of its components. HMRC have provided guidance to help correctly identify the HS codes.

The “value or weight limit” rules provide that the value of NOMs may not exceed a given percentage of the ex-works price of the good. To illustrate, the PSR for grand pianos is ‘MaxNOM 50%’, that is up to 50% of the piano can contain NOMs. Therefore, if a grand piano has an ex-works value of £1000, it will be an originating good if no more than £500 worth of NOMs are used in its production.

In addition to the PSRs, there are other overriding rules that restrict these rules further or make allowances in certain instances.

Under the rule of “bilateral cumulation”, goods are automatically considered as originating in the UK, where it uses components originating in the EU and these EU components are further processed in the UK or incorporated into another product prior to re-export to the EU. This is subject to the “insufficient production” threshold.

There will be “insufficient production” where the processing carried out in the UK is so minor or simple that it does not confer originating status. These processes are outlined in the TCA and include “simple painting and polishing operations”. This threshold applies to all PSRs, except the wholly obtained rule.

On the other hand, the “tolerance” rule allows a good that has failed to meet its PSR to still be considered as originating, by permitting a limited amount of NOMs to be included in the good. For example, manufactured goods can contain NOMs that are worth less than 10% of the ex-works price of the good.

If the goods meet the rules of origin, exporters have to complete and retain a statement of origin. This statement can be added to an invoice, delivery note or any other commercial document and should describe the originating product in sufficient detail to enable its identification.

Where a product does not meet the origin rules, the relevant exporter must also hold evidence, such as supplier declarations (SD), to show the originating status of the different components used in the manufacture of the good. Until 31 December 2021, for EU-UK trade, businesses do not need to provide SDs; however they may be required to do so retrospectively after that date.

Although the post-Brexit trading landscape seeks to maintain favourable relationships between the UK and EU by prohibiting quotas and tariffs, traders have to overcome more hurdles to achieve the same benefits as before. It is clear the complex rules relating to the origin of goods are already causing damage to businesses, especially SMEs who rely heavily on exports to the EU, so much so that some manufacturers have opted to pay the tariff costs to avoid the cost of the paperwork. It will be interesting to see if these are merely teething problems or indicate a more permanent state of affairs – either way, it is essential that exporters to the EU have an understanding of the rules of origin.

This article is from the May 2021 issue of Upload, our newsletter for professionals with an interest in technology. To download the latest issue, please visit the newsletter section of our website. For further information please contact a member of Birketts’ Corporate and Commercial Team.