What business needs to know about trading goods under the EU-UK Trade and Cooperation Agreement

In this alert, we focus on the key takeaways for trade in goods under the EU-UK Trade and Cooperation Agreement ("EU-UK TCA").¹ Bilateral trade between the UK and EU will be duty free and quota free provided the relevant origin rules are satisfied. Customs formalities will apply, although certain simplifications will be available at the outset or over time. Compliance with product regulations, including packaging and labelling, will bring additional burdens, but self-declaration of conformity will be possible for low-risk products. The EU-UK TCA is, in many ways, a classic EU Free Trade Agreement, with certain important facilitations for traders and producers.

Customs formalities, simplifications, cooperation and breaches, governance

Although import tariffs will not apply in most cases (see below), customs formalities will apply from 1 January 2021. Declarations are required for imports and exports, and formalities will also apply to goods in transit. Businesses must become familiar with, and ensure they have access to, relevant IT systems. For certain logistical operations, businesses must pre-register data before arriving in ports of departure (to avoid congestion). Businesses may use a third party, such as freight forwarders or customs agents, to act as their representatives but they are not obliged to do so. Additional time and cost will need to be factored in.

Some temporary easements will apply: between 1 January 2021 and 30 June 2021 for goods imported from the EU to the UK – but not vice versa – traders will have up to 6 months to submit a full customs declaration and pay any tariffs due in the UK (e.g., where goods do not satisfy the rules of origin), including declaring any proof of origin. In addition, for goods imported from the EU to the UK and UK to EU, traders do not need suppliers’ declarations to be in place at the time the goods are exported until 31 December 2021 (but may need to provide these retrospectively).

Fees or other charges can be imposed with respect to certain customs formalities, e.g., attendance of customs staff outside official hours or outside customs premises, to cover certain costs related to analyses/export reports, or the destruction of goods, but in line with relevant WTO rules these must be limited to the approximate cost of the services rendered – they cannot be calculated on the basis of the customs value of the goods.

The EU-UK TCA contains a standard Chapter on Customs and Trade Facilitation. This refers to the key international customs agreements, and calls for cooperation on customs issues in international fora and use of international standards. Important for traders, it provides for mutual recognition of Authorised Economic Operator (AEO) status (and repeats the EU’s existing criteria in an Annex), which means certain simplified procedures will be available for AEOs. AEO status can give access to simpler customs procedures and waivers of certain obligations and faster clearance of goods. The TCA also explicitly provides for cooperation aimed at simplification specifically for roll-on, roll-off traffic and confirms the commitment of the EU and the UK to "endeavour to establish" a Single Window enabling traders to submit documents and data required for imports/exports/transit through a single entry point.

The EU-UK TCS requires cooperation in the prevention, detection and combat of breaches or circumvention of customs legislation. The EU or UK may temporarily suspend preferential treatment of a product/product if it has found "based on objective, compelling and verifiable information, that systematic and large-scale breaches or circumventions" have been committed and the other Party "repeatedly and unjustifiably refuses or otherwise fails to comply with [its] obligations." Measures suspending preferential treatment can only be taken if consultations in the Trade Partnership Committee do not lead to a mutually acceptable solution within three months. Any suspension will normally last for maximum 6 months, but can be renewed. An importer able to show that the imported products are in full compliance with the customs legislation of the Party of import may still be able to claim preferential treatment (or seek recovery of duties paid in excess of preferential rates).

The institutional framework set up specifically for trade is multi-layered. Operating under the Partnership Council, which is intended to oversee the attainment of the objectives of the EU-UK TCA (and any supplementing agreement) and supervise its implementation are the: Trade Partnership Committee; Trade Specialised Committee ("TSC") on Goods, TSC on Customs Cooperation and Rules of Origin; TSC on Sanitary and Phytosanitary Measures; TSC on Technical Barriers to Trade ("TBTs"). Also relevant are: the TSC on Services, Investment and Digital Trade, TSC on Intellectual Property, TSC on Public Procurement, TSC on Regulatory Cooperation, TSC on Level Playing Field for Open and Fair Competition and Sustainable Development, TSC on Administrative Cooperation in VAT and Recovery of Taxes and Duties. Working Groups ("WG") established to date include: WG on Organic Products, WG on Motor Vehicles and Parts, WG on Medicinal Products (all supervised by the TSC on TBTs).

Underpinning the system is the threat of tariffs which may be imposed under the dispute settlement mechanism established by the EU-UK TCA and which applies horizontally, unless a more specific mechanism is provided for. This allows for the suspension of obligations where there is non-compliance under the TCA, including the withdrawal of benefits in areas different to that of the non-compliance.

Zero tariffs – zero quotas

Goods "originating" in the EU-UK free trade area will not be subject to customs duties (see below for origin rules). Goods which fail to satisfy the relevant preferential origin rules will be subject to normal WTO import tariffs (i.e., the Common Customs Tariff of the EU or the Global UK Tariff).² Autonomous duty suspensions are available to assist a domestic processing industry which does not have sufficient local access to certain components or intermediate materials, or under inward processing regimes authorised by the local customs authorities.

Movements of goods (of whatever origin) solely for the purpose of repair³ will not be subject to customs duties.

No export duties or taxes may be imposed on the other Party's goods, and any internal tax or charge (such as VAT and excise duties) cannot be higher than that applicable to domestic products.

As under any FTA, the Parties can impose anti-dumping, anti-subsidy or safeguard measures on each other's goods, subject to them meeting the conditions in the relevant WTO rules.

Origin rules

The EU-UK TCA's rules of origin ("RoO") are in many respects similar to the standard RoOs applying under other "modern" EU FTAs with respect to key definitions and concepts, and general provisions (e.g., on tolerances, insufficient operations, accounting segregation, non-alteration, or administrative cooperation).⁴

A product will be considered "originating" if (i) it is "wholly obtained" in a Party; (ii) if it is produced in that Party exclusively from originating materials, or (iii) if the non-originating materials incorporated in it satisfy certain rules (set out in dedicated Annexes). These product-specific origin rules can (i) require a specific process to be carried out on non-originating materials in the EU or UK, (ii) impose a maximum threshold on non-originating materials used, (iii) require that the resulting product falls under a different tariff (sub-)heading or Chapter, or (iv) be a combination of these rules. Often, there will be alternative rules available, of which only one has to be satisfied.

Important aspects of the EU-UK TCA which should be highlighted include:

• Only bilateral cumulation of origin applies, not "diagonal" cumulation: this means that EU materials used in UK production, and UK materials used in EU production, will count as "originating" materials, and help satisfy the product-specific origin rules. On the other hand, materials originating in third countries (e.g., Japanese parts in UK-manufactured goods or Korean parts in EU-manufactured goods) will not count to satisfy the origin rules, as (like all FTAs) the agreement seeks to encourage maximum sourcing within the FTA area. Processing in the UK may be taken into account to determine whether the product originates in the EU, and vice versa. (Without this provision, a product-specific origin rule requiring certain processes to be carried out on non-originating materials would all have to be carried out in the Party of processing).
• Special origin rules apply within the context of origin quotas (meaning the special rule only applies for a limited trade volume and the standard origin rule will apply for additional trade) for certain fisheries products and aluminium products.
• Transitional origin rules allowing for a higher proportion of non-originating materials will apply to electric accumulators for automotive use and to electrified vehicles until the end of 2026 with gradually declining maximum thresholds thereafter for non-originating materials. At the request of either Party, these special rules can be reviewed with the assistance of the TSC on Customs Cooperation and Rules of Origin. The Partnership Council may decide to amend the origin rules from 2027.
• A statement of origin (issued by the exporter) or "importer's knowledge" that the product satisfies the relevant origin rules⁵ can be used to claim tariff preferences. The precise language to be used in the statement of origin is set out in an Annex. The process is more flexible than under many EU FTAs in that there is no necessity for an exporter to have "approved exporter" status.⁶ The importer must keep for at least three years the statement of origin or the records used to make an importer's knowledge claim. The exporter must keep a copy of his statement of origin and supporting documents demonstrating compliance with the origin rules for at least 4 years.
• Unlike many EU FTAs, the EU-UK TCA does not include a "no drawback" clause. Such a clause normally means that no tariff preferences can be claimed by the importer if the exporter has benefitted from not having to pay import duties on imported input materials under an inward processing process, for example. In bilateral EU-UK trade, however, no such prohibition will apply. It is therefore possible for a UK producer to use inward processing for production in the UK, while an EU customer can still claim tariff preferences upon import into the EU (assuming the origin rules are satisfied). From 2023, the EU or the UK can request a review of this provision. This could lead to the Trade Specialised Committee on Customs Cooperation and Rules of Origin making a recommendation to the Partnership Council to introduce restrictions with respect to duty drawback.

VAT and excise

Imports into the EU are subject to payment of import VAT, regardless of whether the import benefits from tariff preferences. As is currently the case, deferment of import VAT payments or zero-rating may be possible, depending on the options available in the relevant EU Member State. It may be necessary to appoint a VAT representative in certain Member States. Imports into the UK will also be subject to UK import VAT. Payment and recovery of import VAT can be accomplished through VAT returns for VAT registered businesses. This "postponed import VAT accounting" system should improve the cash flow position under import VAT in the UK.

On excise goods imported into the UK from the EU will be subject to excise payments on the same basis as imports from the rest of the world. The UK is establishing some facilitations for payment of excise on alcohol and tobacco products under the Customs Freight Simplified Procedures (CFSP). The UK has established its own Excise Movement and Control System (EMCS) for movements of goods subject to excise suspensions from the port of entry to their final destination.

Import/export licences may still be required

The Parties are able to impose licence requirements on imports or exports, but they must be on the basis of procedures which must be transparent, fair, and non-discriminatory. The EU and UK already have in place a general licence system for exports of "dual-use items" to the other Party, which reduces the burden on EU or UK exporters significantly, compared to having to obtain an individual licence for each export.

Product regulations and product checks

The EU-UK TCA provisions on sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT) largely reflect the WTO rules in these areas, for example requiring transparency, fair and non-discriminatory application of proportionate measures, compliance with which is based on risk assessments, and striving for use of international standards and cooperation. The Trade Specialised Committees on SPS and TBT can discuss issues arising on the interpretation or application of these provisions. The provisions on Good Regulatory Practice and Regulatory Cooperation also contribute to the transparency and review of technical and SPS measures, including conduct of impact assessments for major regulatory measures.

UK goods entering the EU will have to meet the EU's standards, but the Agreement will allow self-declaration of conformity with EU product rules for low-risk products. Some mechanisms should make regulatory compliance easier, especially for pharmaceuticals, autos, wine, chemicals and organic products. Mutual recognition has been agreed for certification of Good Manufacturing Practice in respect of pharmaceuticals and for automobile approvals.

Both the EU and UK are entitled to carry out physical checks of goods imported from the other party to confirm whether these comply with their respective requirements. Border checks are expected to be more of an issue for food and agricultural products than for example for manufactured consumer goods. Even where product standards do not diverge, checks will still be applicable.

Remanufactured goods classified in Chapters 32, 40, 84 to 90, 94 or 95⁷ shall be treated as "new" equivalent goods, and any import/export restrictions on used goods shall not apply to them. A good will be considered a "remanufactured good" for the purpose of the EU-UK TCA if it is entirely or partially composed of parts obtained from used goods, has a similar life expectancy and performance compared to such goods when new, and is given an equivalent warranty as to that applicable to such goods when new.

Cultural property

Although a relatively small proportion of overall trade in goods, the EU-UK TCA specifically provides that the EU and the UK will also cooperate in facilitating the return of cultural property (such as national treasures with artistic, historic or archaeological value) illicitly removed from the other Party's territory. This entails notifying each other when cultural property is found in their territory – including as a result of border checks – and there are reasonable grounds for believing the property was illicitly removed from the other Party.

_{1 See here for the Draft EU-UK TCA as agreed in principle and made available on 26 December 2020. This alert does not discuss the special arrangements under the Protocol on Ireland/Northern Ireland of the Withdrawal Agreement.
2 See here for the EU CCT 2021, and here for the UK Global Tariff Tool.
3 "Repair" does not include operations which lead to the destruction of the essential characteristics of the goods or a new or commercially different good, operations which transform an unfinished good into a finished good, or a technical upgrade of the good.
4 A helpful document has been published by the UK Government: The Trade and Cooperation Agreement (TCA): detailed guidance on the rules of origin. assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/948257/The_Trade_and_Cooperation_Agreement__TCA__-_detailed_guidance_on_the_rules_of_origin__29_December_2020_.odt
5 This is in line with the EU-Japan FTA, for example.
6 Under many EU FTAs, an exporter would need to obtain such status before he can issue a statement of origin for shipments above a certain value.
7 These Chapters contain, for example, pigments/paints, rubber and leather articles, machinery, tools and instruments, furniture, toys and games.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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