By Roger Isaacs, Partner at Milsted Langdon
As the UK faces the prospect of an era of new trading relationships, as it strikes up new deals in preparation for a future beyond Brexit, it is important that businesses reliant on imports and exports understand a critical factor in the setting of duties – the rule of origin.
Currently, the UK relies on the European Union which has rules for establishing the country of origin of imported and exported goods, which are required to classify items and the duty that is due on them.
Of course, some goods imported from or exported to certain countries will qualify for preferential treatment and so it is vitally important that businesses understand the rules clearly and can define the origin of goods.
The Three Elements
The rate at which duty is paid on goods depends on three elements – the type of goods, the country to which they are being imported and their deemed country of origin. The key step is defining the point of origin for the goods.
There are two main categories for the rule of origin goods; wholly obtained or produced in a single country and goods whose production involves parts or materials from more than one country.
The former is obviously fairly simple to determine and generally affects raw materials, such as steel and agricultural goods such as vegetables and fruits.
However, consider a washing machine. This would rarely be produced in a single country. Instead, it is formed of parts shipped from all over the world and put together in a final production process, usually within one country.
This complex movements of parts are where things get complicated when it comes to tariffs, which is why it falls under the latter category when it comes to origin.
In this category, customs must consider the origins of the materials, the country in which the final substantial production phase took place and the value of the work and processing in each country before a final duty can be set.
Where a product is manufactured entirely in the EU and is then exported to a country, where there is a preferential arrangement, it may attract lower or nil rates of duty. This is currently the case with the existing free trade agreement that exists between member states.
However, if only some of the components are produced in the EU and the final item is assembled in another country outside of the economic bloc then customs may judge that that the product originates from the country where it is assembled.
Ultimately, it will depend on the agreements that are in place between the country of origin and the final country in which the product is assembled, as well as their arrangements with the final country of import.
When exporting or importing goods traders are required to check what preferential treatment is available under a tariff preference scheme, which is why establishing origin is vitally important.
Any preferential rate of duty depends on preferential coverage for goods of that type between the importing and exporting countries or between the EU and a third country and the product.
Again, this is where origin is essential as the product will be required to meet the relevant rule of origin; wholly produced in the preference country or substantially manufactured there according to the particular rules and not subject to a quota which would limit the quantity of the product that can be brought in under preference.
By going through this process, a business should be able to reach a decision that will allow it to check the customs classification, which will show if the goods qualify for a preference scheme.
For British businesses, the UK Trade Tariff is the most up-to-date source of information on preferential agreements, while consideration should be given to the Commodity Code. These should indicate whether a product is also liable to trade protection measures such as anti-dumping duties or Common Agricultural Policy charges, which are also determined by a product’s origin.
It is the responsibility of exporters to ensure that the rules of preferential origin have been followed correctly. Exporters must check with customs authorities in which the product is sold to clarify what preferences are available, or in the case of UK businesses, it may be possible to check with the Department for International Trade (DIT).
At the other end, it is an importer’s responsibility to ensure that the correct amount of duty is paid. Importers can be held liable for any unpaid or incorrectly paid duty for up to three years after the product has been imported.
Businesses have to prove to HMRC that they are entitled to claim preference for the goods that are being exported or imported. Of course, this should have been established by the exporter, but it is important that importers also confirm this.
The proof required will depend on the goods, and the country of import, particularly if the preference scheme is autonomous or reciprocal, which will define whether it applies to imports only or to both imports and exports from that nation.
Those looking to save time and provide assurance to a business should seek out a Binding Origin Information (BOI), which is a legally binding document from customs authorities that clarifies the origin of goods.
HMRC regularly monitors goods that are being imported or exported under preference, which is why business must keep all relevant paperwork for up to three years. If origin can’t be proved or defined then customs organisations, such as HMRC, may require a business to pay the full rate of duty on the goods, which can be considerably higher. Businesses which apply preferential arrangements incorrectly could also face penalties.
The rule of origin is a minefield for exporters and importers. Failing to categorise a product correctly could clearly land them in hot water with authorities and result in considerable costs.
As the world has grown ever more interconnected and supply chains ever longer, it is not uncommon for products to contain minute parts, each from a different country.
This makes classifying origin even more complex. Thankfully the UK enjoys preferential customs agreements with many nations, although the future of these may well be called into question in the event of a no-deal Brexit.
Looking ahead, the creation of new preferential agreements post-Brexit are likely to play a key role in the future of imports and exports. If the UK ceases to be treated as part of the EU for rule of origin purposes, many businesses that trade within Europe and which have not previously had worry about this complex issue, will have to get to grips with it in short order
The more arrangements that are in place the less complex, in principle, the rule of origin should become. However, unless all nations agree to preferential treatment for all goods, for all nations they trade with then the complexity the rule of origin adds to trade will never be truly eliminated.