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Custom duty and product origin after Brexit

Alex Baulf Alex Baulf

Whatever post-Brexit free trade agreement the UK government manages to agree before next year, likely the import product origin of your goods will have a key role to play in your profit margins. Alex Baulf explains what the new rules will mean for the custom duty you pay.

The Brexit transition period will end on 31 December 2020 and negotiations are ongoing to work out what will replace current arrangements to ensure continuity of trade.

For example, the UK could request to become a member of the Trans-Pacific Partnership to foster trading relationships with Japan, Canada and Mexico, among others.

Free trade agreements allow goods to be imported at a lower or nil rate of custom duty, by applying preferential tariffs or ‘preferences’ to goods originating from certain countries that have 'preferential origin', subject to quotas and limitations. Where tariffs are zero under global tax, preferences offer no further benefit, but there are significant potential savings where higher standard custom duty rates apply.

These preferential custom duty agreements can either stand autonomously or be reciprocal, where countries agree preferences for goods moving in both directions. A new UK/EU free trade agreement would very likely be reciprocal and directly related to preferential origin. 

As such, the origin of goods being imported will be vitally important to determining how much profit you're going to make on the goods. Determining the origin of the goods, however, may not be straightforward. 

An example of how origin affects custom duty

For example, if a textile manufacturer imports fabric into the UK from China, it may be cleaned in France before being moved to the UK. If a free trade agreement is reached in respect of a preferential rate of custom duty for European Union goods, would the fabric qualify as Chinese origin or French origin? If the fabric is used to make clothing in the UK, would it then be of domestic origin?

When goods are wholly produced in a country with no other work conducted, origin is usually conferred to where the goods were produced. However, where goods are not wholly produced in one country, the goods are judged on the principle of sufficient transformation standards. A product can be considered to originate from a secondary location when it is considered to have been sufficiently transformed there.

There are different transformation standards for different goods, but often a product is considered sufficiently transformed when its category changes to a different four-figure tariff heading from the constituent materials. Otherwise, transformation may be determined by a significant value being added to the product in the secondary location.

Simple processing, including cleaning, ironing or bottling doesn't amount to sufficient transformation to confer a new origin. Yet, evidencing this to regulators can be challenging.

Evidencing origin to custom duty authorities

In order to claim preferential rates of custom duty, an importer will need to provide evidence of the origin of their goods. Requirements for this will differ based on the exporters’ status, value and the country of origin. For low-value, postal or private exports, in some circumstances an invoice declaration can be used.

Often, however, origin is conferred through a certificate, completed by the exporter, supported by an invoice, and authenticated by the relevant customs authority. Simplified procedures apply for approved exporters, including the Registered Exporter Scheme and those with Approved Exporter status, who can usually evidence origin through invoice declarations for goods of any value.

A Binding Origin Information ruling will provide an importer with certainty of the origin of goods. These rulings can be helpful where it is difficult to confer origin, or the value of goods makes a ruling commercially attractive. Rulings remain valid for three years from the date of issue.

What to do next for post-Brexit custom duty

As you can tell, the process can quickly become complex, and you don't have long to get to grips with this, since the new rules will be in place on 1 January. Before then, you will need to have reviewed your supply chain to anticipate opportunities for preference, especially in relation to a new UK/EU free trade agreement. You will then need to calculate custom duty costs savings, take into account procedural steps and consider all this in context with your wider Brexit planning.

Not to mention, you'll need to train your staff in these new processes, including customs declarations and new finance processes. Thankfully, you don't have to do this alone.

Whatever free trade agreements are in place at the start of the new year, our experts can help you understand your responsibilities and opportunities and spread that knowledge throughout your business.

For help with customs compliance and maximising custom duty opportunities, contact Alex Baulf.

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