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How will the rules of origin affect my business

As we approach almost a month since the EU transition period came to an end, firms across the UK and EU are continuing to adjust to post-Brexit changes. It has already resulted in some disruption and confusion.

While many welcomed the agreement of a trade deal between the EU and UK in December, businesses are still trying to understand what the details of the agreement mean for their operations.

One of the critical parts of the UK-EU Trade and Co-operation Agreement (TCA) was rules of origin. Despite being just one section of the multi-page document, it has been one of the most discussed among businesses and the press.

This blog explains what rules of origin are and what they could mean for your business under the TCA requirements.

What are the rules of origin?

Rules of origin are concerned with where the parts that make up a product are from. They tend to be associated with car production but can apply to any manufactured good made up of parts.

They are used to classify where an export has come from and determine the ‘economic nationality’ of a product. By the EU putting rules of origin in place, they want to prevent any country they are trading with from buying cheap parts from non-EU countries and then exporting them tariff-free to EU member states. These parts would typically be subject to tariffs if they were coming directly from the third-party country to the EU.

Under the TCA, UK exports to the EU need to be made of at least 45% UK or EU-created parts to comply with the origin rules. This also applies to EU exports being sent to the UK. So, businesses who wish to trade with the EU need to pass the 45% threshold to benefit from tariff-free exports and imports.

What do the rules of origin mean for my business?

Currently, the rules of origin will have minimal effect on businesses, though you should aim to follow them now. This is due to a one-year grace period having been agreed between the UK and EU, under which exporters do not need to provide evidence of the origin of parts. This grace period comes to an end on 31st December 2021, after which proof of origin must be provided as part of export checks.

It is worth noting that UK firms are already being advised to keep internal records of the origin of parts they used, as this will make for a smoother transition once the easement ends on 31st December.

For businesses who export to the EU, this means ensuring that they utilise parts created in the UK or EU countries when producing their goods to pass the 45% quota. If you already do this, it will mean little change. However, if you do not, you may need to look at changing your suppliers.

The implication of utilising EU and UK parts means that some manufacturers may see increasing costs if they have typically relied on cheap imports from non-EU countries. When negotiating the deal, the government had requested that parts from Japan and Turkey were included in the 45% (offering businesses more scope for supplies), but this was rejected. As such, firms will need to plan to determine how they will meet the requirement and adapt their supply chain accordingly. They will also need to account for the cost fluctuations associated with switching suppliers.

If products do not meet the origin rules, a 10% tariff will be applied once they are imported into their destination country. While this does give exporters the option not to follow the rules, prices will increase as a result and may deter customers from buying from you over cheaper competitors.

Similarly, if you are importing into the UK from the EU and your supplier doesn’t adhere to the rules, you may face cost increases on your supplies.

The rules of origin have already drawn some criticism from businesses, particularly in Northern Ireland. This issue occurs when goods are moved from one EU country to another (including Ireland) but are packed in the UK in between, leaving them subject to tariffs when being reimported to the EU. Government officials have stated they are making enquiries, but a solution is not guaranteed.

Full information about what the origin rules mean and how businesses can adapt to them can be viewed on the government website.

How do I prove the origin of parts?

Proof of origin is usually disclosed through certificates or declarations, though the actual evidence required may depend on what products you are exporting. Depending on the evidence you need, you will need to obtain it by contacting the appropriate body, including your local Chambers of Commerce or the Institute of Chartered Shipbrokers.

Alternatively, you can make an origin declaration, using documentation such as a shipping note or invoice to verify where your parts have come from.

Full information about the different forms of origin proof and how to get them can be read here.

Proof of origin will need to be supplied to HMRC ahead of export to ensure your products can smoothly reach its destination if it complies to the rules, or whether a 10% tariff is applicable.

What are the broader implications of rules of origin?

As well as the impact on individual businesses in the UK and EU, the rules of origin agreement potentially has broader implications on industries.

This is most prominent in the car manufacturing industry, which has historically utilised parts from all over the world during production. Under the TCA, car manufacturers have been given until 2027 to increase the use of EU and UK parts in cars to meet the rules. There is also a specific clause that batteries in electric vehicles created in the UK or EU must originate from either side.

It is feared that these objectives will create difficulty for the industry as a whole. This means car manufacturers in the UK, as with other businesses, must plan now to meet the origin rules and prevent becoming subject to tariffs.

The rules also will require battery manufacturers and other car parts producers to invest in setting up plants in the EU or UK. The EU is ahead in this area in terms of infrastructure, so it is believed that companies would be more likely to invest in setting up in the EU – where there is a bigger market to target – than in the UK.

As electric vehicles become more popular, this may lead to an increasingly reliance on EU car imports and a smaller focus on UK production – resulting in less jobs and revenues domestically.

Get advice

If you are exporting manufactured goods, it is essential to understand the rules of origin under the UK-EU trade deal and the impact it may have on your operations. This means planning ahead and adapting your supply chain to adhere to the rules – or account for a 10% tariff.

While disruption and some uncertainty remain, the coming weeks will determine the exact effect of rules of origin and other post-Brexit changes on business as a whole.

If you are still coming to terms with new processes now that the UK is no longer part of the EU, we are here to help. Our team of expert advisors have experience in a number of integral topics, including import and export rules.