The excessive use of the phrase ‘tariff-free’’ in media articles has created a misleading impression about the reality of Britain’s Brexit deal with the EU. Crucially, tariff-free is dependent on compliance with complicated rules of origin. Here, Chris Johnson, director of bearings supplier and relubrication specialist, SMB Bearings, explains some of the intricacies of the new trading arrangements and how businesses can get to grips with life after Brexit.
Supply chains
When the UK finally secured a trade deal with the European Union at the end of December 2020, it was boldly declared that this agreement would guarantee tariff-free access. While this is technically true, it ignores the added weight and complexity of red tape the new trading arrangements brought for many businesses. Above all, it was not made clear at the time that tariff-free depends on compliance with complicated rules of origin.
Originating versus non-originating
Originating goods are those of UK or EU preferential origin. Most of these can be shipped tariff-free between the two areas although they are still subject to Customs checks. Non-originating goods are those of non-UK or non-EU origin. However, we were surprised to discover that originating goods are not necessarily those made wholly in the UK or EU.
The origin of the product’s component parts is very important. Goods that are made in the UK may not qualify as originating if they contain more than a certain quantity of non-originating parts, while goods which are not made in the UK can take on originating status with a high percentage of non-originating parts. Confused? So were we!
Products from outside the UK/EU may take on originating status provided the goods have undergone sufficient processing. In other words, there must be a sufficient value, or weight, of UK input. Alternatively, goods may qualify as originating if the final product has a different tariff code from the original parts after processing.
As a UK supplier, if you use too high a value of non-UK or EU goods in your final products, it may not be possible to declare them as preferential origin goods. This rule is clearly designed to prevent widespread abuse of preferential status. For example, a UK company who has previously imported Chinese products for sale in the EU, might start importing the component parts, assemble the product with a few British nails or screws, and claim UK origin.
Change of tariff heading
You may be able to use unlimited quantities of non-originating goods provided there is a change in the Customs tariff heading. In other words, the product has changed sufficiently to be classified as something different. The detail on what is allowed for each tariff code is contained in a very useful document called “Detailed Guidance on the Rules of Origin” which is part of the UK/EU Trade and Cooperation Agreement.
Imagine, for example, we were to attach a clasp or a stud to a pair of small Japanese bearings and export them as earrings.Even if the stud cost significantly less than the bearing, we could declare the finished articles as preferential origin goods because the tariff heading would change from ball or roller bearings (8482) to imitation jewellery (7117).
UK process of sufficient value
If you carry out a specialist process and the value of that process is more than half the value of the finished article, you can declare the product is of UK preferential origin. Understanding this rule has been important for us, as we provide a bespoke lubrication service to our international customers.
Let’s say we import a bearing that costs one Pound, including freight and duty. We carry out a specialist process, using bespoke equipment, to clean and re-lubricate it and the associated cost of cleaning products, heating, lighting, and wages amount to at least one Pound. In this case, the processing value surpasses fifty percent of the value of the finished article, so we can claim UK preferential origin for the relubrication bearings.
There are also processes that do not change the status of imported parts to originating. If we import non-originating bearing components such as rings and retainers (tariff code 84829900) and steel balls (tariff code 84829100), and assemble a complete ball bearing, the tariff code is now 84821010. The first four digits of the tariff code have not changed, and the component parts are non-originating, so we cannot claim preferential origin.
In addition to the above, it is worth bearing in mind that simple processes fall under the heading of “Insufficient Production”. Simple assembly, cleaning, polishing, repacking and labelling are examples. You may import non-originating table-tops and table legs which you sand down, paint and then assemble into a complete table. The cost of your efforts may exceed the cost of the individual parts, but you would not be able to claim preferential origin because your process is classed as a simple process or “insufficient production”.
Other examples of insufficient production include the shelling of peanuts and the grating of cheese but there are exceptions. Let us assume that you have a market for cheese that is cut or grated in a very unusual way. If you needed some bespoke machinery just for that process, and this added sufficient value to the UK processing cost, you may have a case for claiming preferential origin.
Life after Brexit?
We’ve been working hard to make life easier for our customers over the past year or two. We now have Authorised Economic Operator status and we are also authorised for Customs (bonded) warehousing and Inward Process Relief. These authorisations allow us to import goods for overseas customers without paying import tariffs. Inward Process Relief has been particularly useful for the import of non-originating bearings from EU customers for re-lubrication.
Before Brexit, it was almost as easy for a UK company to sell to the EU as it was to sell to a UK-based customer. That world already feels like a distant memory. Understanding and navigating the new rules of origin has been key to helping us adjust to this post-Brexit trading arrangement. At times it was confusing and fraught with uncertainty. We’ve certainly had a few late nights rummaging through the “Detailed Guidance on the Rules of Origin”. We are grateful for many of our customers who have shown patience through these trying times, and we are grateful that now, after all this time, there finally is life after Brexit.
- The author, Chris Johnson, is managing director of bearings and relubrication specialist, SMB Bearings.
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