The new freedoms of the UK following its exit from the EU and the expiry of the Brexit transitional period on 31 December 2020 include the freedom for the UK to pursue its own trade policy. This includes the ability to conclude Free Trade Agreements ("FTAs") with other countries or trading blocs. Given that UK trade lost the benefit of existing EU FTAs and free access to the EU, there was a pressing imperative for alternative FTAs to be agreed.

To that end, the UK has been engaged in negotiating so called 'roll over' FTAs to replace the EU ones.[1] In addition, the most significant FTA concluded by the UK is the Trade and Cooperation Agreement (the "TCA"). This was concluded between the UK and the EU last Christmas Eve and is currently applying on a provisional basis pending approval by the European Parliament and ratification by the Council of the European Union. It has been implemented into UK law under the European Union (Future Relationship) Act 2020.

A key aspect of an FTA is the ability for businesses to benefit from "preferential tariff treatment" (i.e. reduced or zero tariffs and quotas) in respect of trade in goods between the UK and countries with which the UK has concluded an FTA. This is, however, only available to businesses which can demonstrate that their goods satisfy the "Rules of Origin" set out within the applicable FTA.

These developments have added an extra layer of complexity to the established international supply chains of businesses involving the UK, following its exit from the EU. Further, some UK businesses who focussed on EU trade only are for the first time contending with Rules of Origin. The challenge in that context is that Rules of Origin are often complicated and highly fact specific, where failure to adhere properly to these rules can result in substantial payments of import duties.

In this article, we set out an overview of the common Rules of Origin, as well as the key considerations for businesses in complying with these rules.

Overview of Rules of Origin

In order for goods to attract preferential tariff treatment, they must have "originated" or have been manufactured in the territory of one of the signatories to the FTA. This can be demonstrated if the product:

  1. has been wholly obtained within one of the parties;
  2. contains a certain amount of regional value content;
  3. undergoes a tariff shift in the course of the manufacturing process; or
  4. requires a specific type of processing within a territory of the signatory parties.

Although these rules have a number of common principles their application varies depending on the type of goods and the terms of the relevant FTA.

Wholly obtained products

Products will be "wholly obtained" if they occur naturally and are extracted from within the territory of a party to the relevant FTA. For example, a plant or plant product which is grown and gathered within the UK would be "wholly obtained" within the UK.

Alternatively, a product which is produced within the territory of a party exclusively using products which originate within that party, will be considered to be "wholly obtained" within the party.

Regional value content

Under this rule, a finished product must contain either a maximum amount of non-originating materials or a minimum percentage of originating materials. For example, under the TCA, the components which originate from outside the UK or the EU used in vehicles must be no more than 45% of the total ex-works price of the finished product.

Tariff shift

If a product is manufactured within one of the parties to the FTA using "non-originating" materials, it will benefit from preferential tariff treatment if it undergoes a change in its tariff classification as a result of the manufacturing process.

This means that any non-originating materials used in the product's production must have a different chapter, heading or subheading of the Harmonized System.

Specific processing

Finally, the product specific rules of origin under an FTA may require that a specific type of processing takes place within the territory of one of the parties. These are particularly prevalent for items of clothing and apparel which may require "weaving combined with making-up including cutting of fabric".[2]

Tolerances

Even if a product does not satisfy the product specific rules of origin, it may nevertheless benefit from preferential tariff treatment under an FTA's general tolerance rule. These rules allow manufacturers to use non-originating materials up to a specific weight or value. These rules are, however, specific to each FTA and will vary depending upon the commodity code of the product.

Cumulation

Finally, importers may be able to benefit from "cumulation" provisions within an FTA.

The TCA allows for "bilateral cumulation". This means, for example, that a product which originates in the UK will be considered as originating in the EU if that product is used as a material in the production of a separate product within the EU or else undergoes further processing within the EU.[3]

Certain UK FTAs go further, allowing for "diagonal cumulation", allowing products to incorporate non-originating materials from certain third countries. For example, in the UK's FTA with Morocco, products which are obtained within the UK and incorporate materials originating in Switzerland, Liechtenstein, Iceland, Norway, Turkey or the EU will be considered as originating in the UK.[4] Although the UK initially sought to obtain a similar approach within the TCA, this was rejected by the EU.

What does this mean in practice?

The Rules of Origin are complex and claiming preferential tariff treatment requires consideration of a number of different factors, including the product's commodity code, composition and the terms of the applicable FTA.

However, once businesses have determined that their products are eligible, further procedural steps are required in order to claim preferential tariff treatment.

How do I claim preferential tariff treatment?

A claim for preferential tariff treatment should be made to the customs authorities at the point of import by either the exporter or importer of the products. This can be made in several ways, depending on the terms of the applicable FTA. These include:

  1. an origin declaration made out by the exporter;
  2. importer's knowledge; and/or
  3. a movement certificate (e.g. an EUR1 or EUR-MED).

Origin declarations

Under the EU and the UK FTAs, exporters may provide a statement which demonstrates that their product originates within one of the signatories to the FTA. This must be included on an invoice or other commercial document and must describe the product in sufficient detail so as to enable it to be identified by the relevant customs authorities.

Importer's knowledge

Both the UK-Japan FTA and the TCA introduce the concept of "importer's knowledge" about the originating status of the relevant products as a means of claiming preferential tariff treatment.

While the importer's knowledge must be based on information which demonstrates that the product is originating, the exporter is not required to provide any information to the relevant customs authority, including a statement on origin.

In order to make use of the "importer's knowledge option", the exporter should, however, provide the importer with sufficient information about the products, such as the commodity code of the product and the details of the production or manufacturing process.

Movement certificate

Certain UK FTAs, such as the UK-Egypt association agreement, require the submission to the customs authority of the country of import of a movement certificate EUR.1 or EUR-MED, issued by the customs authorities of the exporting party, unless the exporter is an "approved exporter" or the value of the consignment does not exceed EUR 6,000.

The UK continues to use the EUR1 and EUR-MED formats for these certificates, notwithstanding the expiry of the transition period, although the place of origin is now marked as the United Kingdom.

Here to help

Gowling WLG's International Trade and Customs team regularly advises clients in carrying out risk assessments, origin management exercises and maximising utilisation of free trade agreements and reclaiming overpaid duties.

We also advise businesses on the post-Brexit customs and trade landscape and steps to take to reduce risk, minimise duty exposure, and keep goods moving.

[1] Details of the current UK FTAs is available at: https://www.gov.uk/government/collections/the-uks-trade-agreements.
[2] See TCA, Annex ORIG-2.
[3] See TCA, Article ORIG.4 (1)-(2).
[4] Article 3(1).