What are the Rules of Origin and why are they a problem?

UK goods will be hit with tariffs by the EU  – unless they meet the Rules of Origin requirements.

The term ‘Rules of Origin’ has been mentioned in conjunction with many stories about post-Brexit complexity in recent weeks. Major retailers such as Marks And Spencer, John Lewis and TK Maxx have had supply issues in Northern Ireland. The latter two companies have suspended deliveries to Northern Ireland while they try to solve the problem. Other businesses have changed their logistics processes to circumvent any considerable costs. 

“I just shifted all my Republic of Ireland clients from my UK office, which is traditionally the Support Centre to direct deliveries from the Netherlands, because of the complications of going through Northern Ireland at the moment,” says one FD of a manufacturing company with offices in the UK and Europe.

The new rules

Under the Trade and Co-operation Agreement (TCA) between the UK and the EU, UK-made goods that are exported to the EU are tariff-free, and vice versa. Exports should operate, from a tariff perspective at least, the same way as they did before the transition period ended.

Where complications arise is in the definition of ‘UK-made’. Many manufacturers and retailers source elements of their products from outside of the EU. Those components must be significantly altered in the manufacturing process in order to remove any potential tariffs they may incur.

This is a particular issue for clothing manufacturers, food retailers and car manufacturers, which will often source a number of materials and components to make products.

“If those goods originate from outside Europe, they come into the UK and have been shipped to a central distribution place in Germany, they’re now subject to a tariff between the UK and the EU because the goods don’t carry the right certificate of origin,” says the FD of the manufacturing company. “In six months’ time, we will have found a new norm. The problem is that the new norm is likely to meet, in my opinion, a slow erosion of the manufacturing base in the UK.”

How it affects your business/clients

You will have heard a lot about how this affects large retailers and manufacturers, but that doesn’t mean it won’t affect smaller businesses. Smaller retailers selling specialist products online should look at the origin of the materials they use to make their products – and their shipping journeys – to ensure they will not be subject to tariffs.

Where those businesses use manufacturers outside of the EU, those costs may double. If, for example, a clothes retailer has products made in Indonesia and shipped to the EU via the UK, they would be subject to tariffs coming into the UK and then out to the EU.

Even businesses with customers wholly inside the UK may get caught by this when shipping to Northern Ireland; under the Northern Ireland protocol, the country remains in the Single Market.

Beyond small manufacturers and retailers, your clients may find themselves incurring higher costs when buying equipment, depending on their origins.

More paperwork

To avoid these additional costs, companies need a Certificate of Origin to prove that their product has been manufactured in the UK or the EU. Businesses can self-certify their products, but this can be a complicated, timely and costly process, and adds to the additional paperwork required to ship goods between Great Britain, the EU and Northern Ireland. This paperwork, says the manufacturing FD, is the big issue.

“Tariffs aren’t my biggest issue. It’s the costs around paperwork that are the biggest problem. All the major shipping companies and freight forwarders such as FedEx, UPS and DHL, have applied a minimum Brexit surcharge to everything going in and out of the UK. It’s like the old fuel surcharge introduced back in the 1970s when they had the fuel crisis.”

‘Wholly obtained’ versus ‘sufficiently worked or processed’

Life is easier if you can prove that the materials in your products were ‘wholly obtained’ in the UK. According to gov.uk, this includes:

  • mineral products extracted or taken from its soil or from its seabed
  • live animals born and raised there
  • products obtained by hunting or fishing conducted there
  • products produced there exclusively from the products that are wholly obtained.

If goods don’t meet that definition, they count as UK-made if they have been ‘sufficiently worked or processed’: “If two or more countries are involved in the production, the goods are deemed to have originated in the country or territory where they were last substantially worked or processed.”

There are three rules to help determine if the goods meet the definition of ‘sufficiently worked or processed:

  1. Added value: There is no simple answer to what constitutes added value, but essentially, the additional value must meet a defined percentage of the finished good: ‘Manufacture in which the value of all the materials used does not exceed [X]% of the ex-work price of the product’.
  2. The change of tariff classification: In some cases, your goods cannot have the same tariff classification as any of the originating materials used to manufacture it. If that’s the case, you need to compare the tariff classification of all the originating materials used and the end-product to ensure that it is not subject to tariffs.
  3. Manufacture from certain products or specific processes: For some goods, non-originating materials may be used in the manufacturing process. Certain processes may also need to have taken place to get originating status. You could be eligible to import materials in an early state of production, such as fibres used to create yarn, but the same won’t apply if, say, processed fabrics from those fibres were used to produce the same product.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.

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