BREXIT – The end of the transition period

At the end of the Brexit transition period, starting from 1 January 2021, companies trading across the Channel are well advised to ensure customs compliance, in particular in the area of preferential origin, in order to reap the full benefits of the recently concluded EU-UK Trade and Cooperation Agreement.

Background

On Christmas Eve 2020, the European Commission and the UK eventually reached an agreement on the terms of their future cooperation: the EU-UK Trade and Cooperation Agreement, or EU-UK Trade Deal as it has been commonly dubbed. This very-last-minute deal was reached after seemingly endless negotiations that constantly seemed to be at the brink of failure and that were particularly nerve-stretching for businesses with a vital interest in the details of the future EU-UK relationship.

Pending the entry into application of the EU-UK Trade Deal, which requires, notably, a unanimous decision by the European Council, the consent of the European Parliament as well as a corresponding vote by the British Parliament, the Commission has proposed that it be provisionally applied until 28 February 2021. Importantly, the EU-UK Withdrawal Agreement, effective since 1 February 2020, together with the long-contested Protocol on Ireland and Norther Ireland, remains in place.

The EU-UK Trade Deal covers the following areas: trade in goods and in services, digital trade, intellectual property, public procurement, aviation and road transport, energy, fisheries, social security coordination, law enforcement and judicial cooperation in criminal matters, participation in selected EU programmes as well as thematic cooperation.

Despite the broad coverage of the EU-UK Trade Deal there will be big changes on 1 January 2021, i.e. at the end of the Brexit transition period during which EU law still applied to a large extent to the UK despite it already having ceased to be an EU member state eleven months earlier. In the following, we take a closer look at the main implications from a customs perspective.

Big changes as from 1 January 2021

As from 1 January 2021, the UK will leave the EU Single Market and the Customs Union, as well as most  EU policies and all international agreements with third countries. As a matter of principle, the free movement of persons, goods, services and capital between the UK and the EU will thereby come to an end. The EU and UK will henceforth form two distinct regulatory and legal spaces and two distinct markets, separated by more than just the Channel. This will re-introduce barriers to cross-border mobility between the EU and UK as well as barriers to trade in goods and services, leading to increased costs for businesses and requiring adjustments to integrated EU-UK supply chains.

Zero tariffs and zero quotas on all goods from day one

When it comes to liberalizing trade in goods in both directions, the EU-UK Trade Deal foresees the most ambitious market access commitments ever to feature in an EU free trade agreement: zero tariffs and zero quotas on all goods from day one, which is much more advantageous for both sides than if trade in goods between the UK and the EU would have had to be conducted on basic World Trade Organization (WTO) commitments under which, for example, imports of cars would have been hit by tariffs of 10% whereas imports of certain foodstuffs could have faced prohibitive tariffs of over 50%.

Yet, as important as the agreement to maintain zero tariffs and zero quotas on trade in goods between the EU and the UK may be, the EU-UK Trade Deal does not change the fact that future trade between the EU and the UK will still fall decisively short of the frictionless trade enjoyed by both Parties under the EU´s Customs Union and Single Market. Besides the fact that all imports into the UK must henceforth meet all EU standards and will be subject to regulatory checks and controls for safety, health and other policy purposes, this is so mainly for the following two, customs-related, reasons.

New customs checks and formalities will apply on both sides

As noted earlier, as of 1 January 2021, the UK will no longer be part of the EU Customs Union. This implies that, as from that date, all customs formalities, including entry and exit summary declarations, as well as controls required under EU law (mainly to be found in the Union Customs Code and its related instruments) will apply to all goods entering the customs territory of the EU from the UK, or leaving that customs territory to the UK. Correspondingly, as from 1 January 2021, full compliance with customs rules, notably with respect to customs valuation and tariff classification, will be required in the trade between the EU and the UK. In practical terms, many companies engaged in trade between the EU and the UK will already be familiar with the relevant customs rules from their prior trading activities with third countries outside the EU. For these companies, the main challenge will be to ensure their internal processes are updated accordingly to make sure they fully comply with this set of rules also with respect to any products exported to, or imported from, the UK. Trade in goods between the EU and Norther Ireland remains unaffected as it will be governed by the Protocol on Ireland and Northern Ireland included in the EU-UK Withdrawal Agreement.

The Trade Deal contains a number of provisions aimed at laying the foundations for smooth customs cooperation in the future, notably via the exchange of customs-related information. It also reiterates a number of mechanisms already provided for in the Union Customs Code and UK customs rules aimed at reducing the administrative burden for businesses and thereby the cost of EU-UK trade. Importantly, both sides have agreed to recognise each other´s “Authorised Economic Operators” programmes which serve to enable trusted traders to whom that status has been granted to enjoy certain simplifications and/or facilitations relating to security and safety in their operations with the customs authorities of the other Party.

The Trade Deal also includes a succinct Protocol on mutual administrative assistance in customs matters as well as a very detailed and ambitious Protocol on administrative cooperation and combating fraud in the field of value added and on mutual assistance for the recovery of claims relating to taxes and duties. Both protocols, staying true to the overarching spirit of the Trade Deal, serve to establish the necessary framework for successful cooperation between the authorities on both sides. Their practical relevance will only become apparent over time.

Rules of origin will apply to goods in order to qualify for preferential trade terms

In practice, the most relevant change will be the fact that under the EU-UK Trade Deal, EU and UK traders will have to meet rules of origin comparable to those which the EU and the UK have already in place with other trading partners. Many companies with international operations will already be familiar with the relevant rules and procedures, the substance of which will not change. What will change, however, is that as from 1 January 2021, businesses will have to also be attentive to these rules in their EU-UK cross-border dealings. Rules of origin serve to determine the economic origin or “nationality” of products that have been produced using components coming from more than one country.

As supply chains have become increasingly international, and pre-materials, components and final products are increasingly produced abroad, in practice, it has become rather difficult to meet the requirements of these rules and to obtain the “nationality” required for the goods to benefit from the EU-UK Trade Deal. Further, as producers need to be able to show the origin of pre-materials at all times when claiming origin of their final products, the administrative burden for the companies concerned is considerably high – and so is the corresponding risk with regard to duty compliance. In fact, the risk will be so high that a number of companies may choose not to claim the benefits coming along with preferential origin.

The EU-UK Trade Deal includes specific mechanisms aimed at facilitating the application of the rules of origin, most notably a provision on “full cumulation” that allows traders to account not only for the origin of materials used but also for the degree to which the product at issue has been worked or processed in the territory of one of the Parties. On the one hand his mechanism makes it possible to account to the greatest extent for the value added within the free trade area, thereby increasing the potential for companies from within the EU/UK to claim the benefits of preferential origin. On the other hand, it also adds an additional layer of complexity for a company’s internal processes to determine origin. In addition, exporters will be able to self-certify the origin of their products, benefiting from additional flexibility in collecting documentary evidence to prove origin during the first year. However, this does not mean that customs authorities will not control whether preferential origin has been correctly declared. It is to be expected that customs authorities will be ready to retrospectively reclaim duties that were originally not collected due to incorrect origin declarations. Given the complexity of both the factual background of international supply chains and the rules under the EU-UK Trade Deal, companies are well advised to ensure full compliance, from day one, in the area of preferential origin in order to fully benefit from the Trade Deal and to avoid suffering a competitive disadvantage.