Indirect tax: the impact of the new EU trade deal

23 February 2021

The UK-EU trade deal is in place, but the finer details are still being assessed. Alex Baulf outlines how the new trade and co-operation agreement will affect indirect tax.

Although the UK officially left the EU on 31 January 2020, it had been operating as a ‘quasi’ member of the EU for a year-long transitional period. As we entered the new year, the UK’s trading relationship with the EU became subject to a new trade and co-operation agreement.

This new arrangement will have implications for every sector, but particularly indirect tax. So, what’s the issue?

The deal

From an indirect tax perspective, the 1,200-page agreement covers the future relationship between the EU and the UK in connection with the trading of goods. The parties have agreed that, while customs formalities will need to be followed, no duties will be payable on goods moving between the UK and the EU, and vice versa.

Tariff-free trade is wholly dependent on the origin of the goods in question, however. If the goods are not of EU or UK origin, tariffs will apply.

If you’re trading goods with the EU, you need to understand these new rules of origin to ensure that your customs declarations are correct and, where necessary, customs duties are paid.

Origin of goods

Businesses with experience of importing goods from non-EU countries will have some understanding of the complex origin rules. But other firms are experiencing the concept of imports (and exports) for the first time in their trading history, and won’t be familiar with these rules.

‘Origin of goods’ has been around for years, but the rules can be extremely complex. Origin doesn’t simply relate to the place from where the goods are shipped. It’s determined by reference to a number of factors, including the place where the last significant processing of the goods took place. Under the terms of trade and co-operation agreement, there are three methods of determining the origin of goods:

1 For goods wholly produced in one country, that country will be the country of origin (eg, grown crops, mined goods and reared animals)

2 For goods that have been changed in nature (eg, the classification or sub-classification of the goods changed), the origin will be where that processing took place

3 Where imported goods are incorporated into originating goods, the finished goods will take on the origin of the country of processing if the value is below a fixed threshold in the tariff

Insufficient production

Notwithstanding these three origin of goods rules, minimal processing of goods won’t change the origin of the goods.

For example, simple operations such as mixing, labelling, screening, dilution peeling or assembly will be regarded as insufficient production. Operations are to be considered as ‘simple’ where neither:

“special skills nor machines, apparatus or equipment especially produced or installed are required for carrying out those operations”.

All importers will need to establish whether their work on imported goods amounts to sufficient production. If they do, then origin of the goods can be conferred in the country where that processing takes place. If not, then origin of the goods can never be conferred by the act of simple processing.

Bilateral cumulation

When determining the origin of goods that incorporate non-originating materials, the value of any EU/UK goods should not be included in the value of non-originating goods under the new trade deal. This is known as a bilateral cumulation and applies equally to EU goods and UK goods.

For example, where a UK product incorporates both non-EU goods and EU goods, the value of the EU goods can be ignored when calculating the threshold.

Similarly, where EU goods incorporate both UK goods and goods from the rest of the world, EU businesses can ignore the value of the UK goods for the purposes of determining the relevant threshold for origin purposes.

Onus on importers to retain evidence of origin

To claim a tariff preference (duty-free importation), British importers of goods from the EU will need to demonstrate to HMRC that the goods originated in the EU.

Importers will be expected to retain documentary evidence to support their claim and to demonstrate that they have undertaken sufficient due diligence, if the EU seller of the goods claims that they have EU origin.

It is important to be aware that it’s the responsibility of the importer to satisfy HMRC that the goods meet the appropriate tests. Failure to provide appropriate evidence may result in tariffs being applied, which can significantly increase the cost of the goods.

Exports and the origin of goods

UK businesses exporting goods to the EU may do so on a tariff-free basis only if the goods are of UK origin. They will be required to evidence how they have determined the origin of the goods in question. And they should keep adequate records of costings, ie, where the finished goods incorporate non-originating goods.

This is something that exporters to non-EU countries are already familiar with, but which will be new to many businesses that have become exporters as a result of Brexit.

Exporters will need to know the origin of any raw materials or component parts that are incorporated into the finished product. If these are of EU origin, they can count as UK origin goods under the bi-lateral cumulation rule. To confer UK origin the goods must be sufficiently produced in the UK (again, simple operations such as mixing, labelling, screening, dilution, peeling and assembly may not be regarded as sufficient).

It’s also possible that the EU customer may request an origin declaration from the UK exporter. When exporting goods, the exporter may need to get a suppliers’ declaration to prove the origin of materials used in the manufacture process, or for finished products that are bought and are re-exported.

This is more likely in situations when any materials used in the manufacturing process don’t change tariff heading or when the value of non-originating materials is over the specified limit.

A declaration of origin may also be required if only minimal processing is carried out or the exporter buys and exports goods in the same state.

Getting to grips with the new rules

The trade and co-operation agreement is a long and complex document. It will be several months before businesses, advisers and HMRC get to grips with the full practical impact. Much of the devil is in the detail and while the agreement is welcomed (as far better than No Deal’), there are nuances of the UK-EU trade deal that will be far reaching.

Any business involved in importing or exporting goods to the EU must now get to grips with these new rules as a matter of urgent priority.

Written by Alex Baulf, Grant Thornton