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Major issues with the Rules of Origin and the new UK-EU trade agreement

Navigating the Rules of Origin and the UK-EU Trade Agreement – do we need to revisit this agreement in light of new negotiated FTAs?

The way that goods can move between the EU and UK has become the ‘stuff of nightmares’ and of legend but retains its ability to cause disruption to supply chains in both territories. The new rules make traders consider using customs special procedures and think innovatively about their supply chains. This issue is colloquially entitled the ‘Distribution hub issue’.

For example, under the Trade Cooperation Agreement (TCA), items of full EU origin – manufactured and originating in the EU – which are then imported and cleared into the UK can claim the zero-tariff Preference. Vice versa, UK goods originating or manufactured in the UK can also claim Preference when imported into the EU.

However, if the same goods which are ‘unprocessed’ or regarded as having undergone ‘insufficient transformation’ and hence not changing their originating status and are subsequently re-exported back or onwards to the UK/EU, then the zero tariff cannot be claimed on this UK-to-EU movement (and conversely on any EU-to-UK movement).

This causes huge problems for businesses who use the UK or EU as a distribution hub for items being imported from other ‘Third Countries’ such as China or USA where the items simply transit the importing country.

Such an ‘Origin’ easement already exists in the Comprehensive and Economic Trade Agreement (CETA) and the new draft UK New Zealand Free Trade Agreement will remove these ‘insufficient transformation requirements’ thus making the Rules of Origin more flexible, simplified and modern.

However, in the short term if the EU-UK Preference on the re-export of goods cannot be claimed.
Businesses have a couple of potential options:

  1. Inform their customers and build in the additional duty costs in their selling price.
  2. If goods are in the same condition when entering the ‘hub’ as when leaving, use Returned Goods Relief. Although in the longer term both the EU and UK have signalled that using RGR should not be used as part of an ‘ongoing commercial business model’.
  3. If there is minimal processing that is insufficient to grant ‘Origin’ (such insufficient processing includes packaging, cosmetic changes, etc.) or the processing does not change the first four tariff code digits, then the client should consider using Inward Processing.
  4. Use Transit or an approved Customs Warehouse (Bond) to hold goods before returning /export.
  5. Bypass the UK and make intra community movements from the EU especially to the Republic of Ireland and Northern Ireland.

However, until (or if) the TCA easement is granted or amended, this remains a major issue for clients using the UK or EU as a distribution hub for their products that are imported only to be subsequently exported onwards or back to the original jurisdiction with no origin change.

Would you like to know more?

If you would like to learn more about how Brexit may impact you, please visit our Practical Guidance: Brexit hub here.

And if you have any questions or would like to discuss your specific circumstances, please get in touch with your usual Blick Rothenberg contact or Simon Sutcliffe using the details on this page.

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