The United Kingdom made the final move to leaving the European Union at 11pm GMT on 31st December 2020. Brexit is now reality.
After 28 years, it left and in doing so created brand-new mechanisms for External Tariff, Quota, Tariff Suspension and Trade Defence, as well as UK Sanctions under the Sanctions and Anti-Money Laundering Act 2018.
After last minute negotiations, the EU-UK Trade and Cooperation Agreements (TCA) was agreed by EU and UK negotiators on 24 December 2020 and provisionally applied from 1 January 2021, initially for a limited period of time until 28 February 2021 until formally ratified by both parties.
The TCA does give both parties zero–tariff and zero–quota access on all goods, but it is not a Customs Union.
It did not remove the need for customs formalities between the UK and the EU. While trade has been suppressed due to Covid-19, trader apprehension about those declarations are beginning to rise with shortages in the intermediary market forcing many to consider self–filing.
Post-Brexit Duty-Free Access?
Many heralded this as a solution to Brexit and the removal of all tariff barriers, but as ever the truth is in the detail.
To qualify for duty-free treatment, the goods need to meet the preferential rules of origin (RoO) – it is not simply enough to be shipped from the EU or the UK.
These rules can be different under the TCA to other EU Free Trade Agreements and in some cases are simplified. But there are some key points about the EU-UK TCA Rules of Origin to consider.
Also, importantly, the duty-free agreement does not apply to any safeguard or trade defence mechanisms.
Bilateral Cumulation
The TCA only allows for bilateral cumulation, so products originating from the Pan-Euro Med area or any other country which has a preferential agreement with both the EU and UK cannot use diagonal cumulation. This means, for example, UK materials used in the EU cannot contribute to Preferential originating status for goods then exported to, say, Canada.
In some UK rollover agreements with non–EU countries, it may still be possible to use EU materials as if they originated within either the UK or the agreement country. For example, UK–Japan although that agreement also allows for each party to seek agreement with the EU for diagonal cumulation.
The bilateral cumulation only applies from 1st January 2021. So any products containing products from the other territory placed into free circulation prior to the 1st January cannot count towards cumulation.
So for example EU stock that was in the UK before the end of the transition period has neither EU nor UK origin in 2021, as it became third country origin on the 1st January.
Even if exported after 1st January, for the purpose of that bilateral cumulation of origin, a ‘process’ should meet two main conditions to allow the products being processed to be considered as originating: (a) it should be considered as a “production” process; and (b) if so, it should go beyond an ‘insufficient production’.
Unfortunately, this can mean regardless of when exported, EU goods exported to the UK (or vice versa) and returned without significant processing also cannot be considered EU (or UK) origin for the purposes of duty-free preference. In such cases, it may be possible to claim so called Returned Goods Relief from duty instead. Therefore, the TCA should not be seen as an easy replacement for procedures such as temporary export, temporary import or processing.
Whilst the EU-UK TCA allows for goods exported to a third country and returned without processing to any of the Parties (i.e. the EU or the UK) and retain its origin, it does not cover goods moved from one Party to the other and returned from there.
Finally, for products exported, for example, from the UK and processed in the EU before 31st January may neither be eligible under the TCA (as the processed UK goods are neither UK nor EU origin so cannot contribute to the originating status) nor will it qualify for Returned Goods Relief as the goods have been processed. So unless the actual EU content is sufficient then full duty may be payable although it would be interesting whether Customs would be open to a retrospective application to Outward Processing Relief to mitigate the duty cost.
Effect on other EU Trade Agreements
As mentioned above, UK goods located in the EU or incorporated in EU goods became non-EU originating after 1.1.2021 and therefore should not be counted towards origin calculations in any EU FTA agreements unless diagonal cumulation is subsequently agreed. The same would apply to UK materials held in non–EU countries prior to 1st January and used to determine origin on subsequent shipping to the EU. Any Long Term Suppliers Declarations or Origin Certificates for UK goods ceased to be valid as EU origin on 31st December 2020.
This means companies still need to review their origin statements and not assume because there is now an FTA that any pre-Brexit planning can be forgotten.
As there is no diagonal cumulation then apart from direct shipping the only way to avoid incurring duty on goods traveling via the UK or EU is to ensure the provisions on direct transport/non-alteration of those FTAs are respected, this may include placing the goods into Customs Warehousing and having to obtain replacement origin certificates.
Proof of Origin
Under the TCA, there is no certificate of origin but a statement of origin by a trader registered on the EU REX system (for shipments beyond 6,000 Euros). Although currently not a requirement to be registered on the REX system, UK exporters are required to provide a statement and include their UK EORI number, regardless of the value of the shipment.
As an alternative, it is possible to claim preference based on ‘Importers knowledge’ which relies on evidence the importer has obtained about the originating status of imported products from the exporter or producer.
To take into account the late agreement, it is possible (up to 31st December) for importers to claim preference or make a statement of origin without a supplier’s declaration at the time of import providing of course the goods meet the rules of origin and a suppliers declaration is sought retrospectively.
Some traders believe because a product is duty-free, they do not need to worry about origin at all.
Whilst that may well be true for their direct imports, if they supply goods to customers who will incorporate them into new products then the origin of the product may be critical in helping the customer meet the origin rule so they can reduce their duty liability.
Northern Ireland
11pm on 31st December also saw the introduction of customs formalities between Great Britain and Northern Ireland which were required to avoid the return of a hard border between Northern Ireland and the Republic of Ireland.
For goods moving between the EU and Northern Ireland then, nothing really changed with goods moving in Free Circulation without the need for customs or Sanitary/Phyto sanitary (SPS) checks.
Equally for goods moving from NI to GB, this is in the majority of cases frictionless unless a trader is exporting controlled goods such as endangered species or items requiring specific license.
Where the major change is being felt is movements from GB to NI, where goods require an import declaration, are subject to EU duties if there is a risk of entry into the EU and must meet EU SPS standards.
Some of this has been deferred during an additional period of easement and of course even if at risk a preferential rate of duty can be claimed (if the RoO are met).
For goods imported into NI from outside GB and EU, then a dual tariff approach applies. If the goods can be proved to be staying in the UK then the UK tariff applies, if not then the EU rate would apply.
This means companies shipping to NI from outside the EU has to potentially consider both tariffs when calculating the potential landed costs.
Future Agreements
Both the UK and EU continue to seek new Trade agreements. In particular, the UK applying to become a member of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) which could be a major boost if the US also returns to the possibility of joining.
How Descartes can Help
Brexit trade issues – from reassessing tariff classifications, duty rates and landed cost – are time-consuming and resource-intensive work to accurately resolve.
Online solutions, such as Descartes CustomsInfo, can help deliver quality classification determinations faster and more accurately, and in a format that can be used for options analysis and presentation to executives.
Related: Please visit our Brexit Resource Center for additional information on how UK businesses can make a successful transition.
