The EU and UK Tariff Rules that will apply
In the event of a hard Brexit, the supposition and likely position are that the EU customs code that applies to imports and exports out of European at present would apply to the United Kingdom as a “third” or external country. The United Kingdom has enacted legislation which applies the equal and exact opposite rules for imports and exports out of the United Kingdom as would apply to imports and exports out of the UK to and from out of the EU at present.
On day one of a Brexit, UK import-export rules would be an exact mirror image of EU rules. This might change a little over time. However, most customs laws and rules are harmonised to a significant extent worldwide so that they are likely to remain very similar. The UK has published some concessions which reduce many tariffs simplify the position for UK importers.
As we have set out in other sections, there are two distinct issues with customs. One issue is the possibility of tariffs which are duties on every import. The second is the cost of the customs compliance process. In a hard Brexit, both costs would immediately kick in. This is because the UK would be immediately outside the EU and each of the UK and EU would have to apply third-country default tariffs against the other.The third country default tariffs are those that apply where there is no trade agreement.
On 13 March 2019 just before a vote to request a postponement of Brexit the UK published a temporary tariff schedule. There are significant variances with the WTO tariff . The temporary UK tariff schedule is available directly from HMRC website.
Possibility of Zero Duties Even Without Agreement?
If the UK dropped out either under a short-term hard Brexit occurring in October or a hard Brexit occurring after a failure to reach a trade agreement at some postponed date, then the default position is that full tariffs would immediately apply as if the EU and UK were each third countries as regards each other, equivalent to China or America.
There is a further possibility that the UK and EU might enter an interim agreement under the WTO (World Trade Organisation) rules which allow that the terms of that agreement be applied to states which are negotiating under the agreement for a final agreement for up to 10 years. If this was the case, then that different treatment might be applied.
Some politicians and commentators have placed considerable emphasis on this exception in the WTO Agreement to the imposition of full third country tariffs. It requires that the two countries are in actual agreement by way of an interim agreement for a future trade agreement. They may apply on a temporary basis zero or other unique tariffs as they wish between themselves.
However, this arrangement would require the agreement of the EU and must provide for a program for a final agreement which could be contested by third countries under the WTO Agreements. It could not be done without the EU’s agreement. It is argued that the EU might prefer to enter a full agreement than an interim agreement.
Although this possibility has been largely dismissed, it could happen. We do see some possibility that the provision could be invoked if the EU was willing to agree.
It is possible that the UK and EU in a doomsday Brexit scenario would agree to try to invoke the World Trade Organisation agreement clause. On the other hand, as in many such scenarios, they may not do so, precisely as a tactic in the trade agreement.
If there were differential arrangements in the above circumstances, then it would be necessary to look at the particular treatment under that UK / EU agreement. Origin issues would also arise, in order to obtain more favourable treatment. This would require certification of origin which is mentioned below. This may not be possible given that many of traders’ products appear to be of non-EU origin.
Under the proposed Withdrawal Agreement which has been rejected, but a future version of which might pass, the UK would technically leave the EU on the stipulated date hypothetically 31 October 2019 (postponed to 31 January 2020 with an effective exit date on 31 December 2020), if the Withdrawal Agreement or an amended version was passed.
However, a transitional period would start at least until the end of 2020 which could be extended to 2021 and possibly again by later agreement. There would be no customs tariffs or any visible difference with the current position in this period.
However, at some point, the UK would leave the EU and the supposition is that there would be a trade agreement in a so-called soft Brexit scenario. Anything else might be more properly called a postponed hard Brexit.
Under the proposed Northern Ireland backstop, Northern Ireland remains in a customs and regulatory union with the EU and GB remains in a customs partnership until the hard border issue is resolved. This would mean that there may be no customs duties or procedures with Northern Ireland and no customs duties with GB.
In theory, this could go on for many years given the present lack of technical solutions. On the other hand, it does not seem likely that the UK would want to be in a position for years where it is a 100% rule-taker so that it might drop out at some stage with some kind of minimal agreement or no agreement at all
The tariff is a very detailed classification of all categories of goods possible in accordance with an international harmonised code, for classifying goods which define the customs duty applicable to particular goods as well as other customs and regulatory treatment.
All goods must be classified in accordance with the tariff. Technically there is a right or wrong answer and it is not always obvious what this is. Issues of interpretation arise as set out separately.
Once the relevant part of the tariff has been found, it is possible to see the treatment that applies to 3rd countries with no agreements i.e. the default Brexit treatment both from the UK perspective and EU perspective, as well as other conditions and measures that apply to the particular goods.
Typically, a rate of duty is prescribed with reference to a percentage of value. Most tariffs in the non-agricultural sector are between zero and seven percent. This is much lower than was once the case and is a result of gradual decreases over the last five or six decades. The customs value has a very definite meaning which is mentioned below. Sometimes tariffs are very high, reflecting peculiar trade policies perhaps protecting particular sectors in the EU or a country.
The tariff will set out the unusual cases where quotas apply so that so much of a product be imported under a licence at a particular rate into the EU as a whole and after that higher rate will apply. The licence may be available for example from the European Union Commission on a first come first-served basis.
In some small number of cases, the tariff applies with reference to weight or a combination of weight plus value. This will be defined in the tariff.
The tariff will usually set out other licensing obligations and regulations that may apply to the import of the particular goods.
The tariff classification lists the “erga omnes” treatment i.e. that for companies with which there is no trade agreement i.e. the default Brexit treatment and that under particular trade agreements.
The tariff is important both in the sense of a hard Brexit in telling the duties that apply and in a soft Brexit in terms of confirming the EU UK trade agreement duty (which very probably will be nil or close to nil across most of the goods) as well as other customs treatments that arise due to the peculiarity of the goods, such as regulatory and licensing requirements et cetera.
In the case of goods sourced from within the European Union and the UK at present, traders should seek comfort from industry sources in relation to the proper classification. The tariff can be especially difficult to interpret and read as there are multiple classifications and the rules are extremely complex. In many cases, the position is very simple and well known in the industry. In other cases, difficult questions of interpretation can arise.
The proper classification of all products is vital. Improper classification is a notorious customs risk. If goods are wrongly classified such that a higher tariff is applied than should be applied or where there should be no tariff, there are obvious business costs and losses. There are time limits and restrictions on reclaiming money wrongly paid to revenue authorities.
If goods are wrongly classified and too little or no duty is paid when duty is due there is a risk of penalties and arrears in customs audit. Broadly the HMRC regime is similar to that in the Republic of Ireland in respect of interest and penalties. It does matter how innocent or deliberate the failure is in terms of basic duty and interest. The costs can still be substantial, and the principal and interest are unlikely to be waived. Penalties may be waived if non-compliance was innocent.
Customs classification can potentially raise very complex issues of interpretation. There are ample sources of interpretation and principles which might apply. The customs code allows for binding tariff rulings which can apply through Europe. However, an application would have to be submitted and they will be specific issues in particular borderline circumstances.
For good reason, the tariff classification is harmonised on a worldwide basis. The principal part of the code is based on worldwide classifications. A further level of detail again is based on common EU standards which may be available at group level in respect of existing imports and exports.
The customs classification under the UK tariff is almost identical to that under the Irish tariff. Sometimes there are additional digits in the UK tariff code which may differ slightly from the EU digits at the very end because of specific local issues. However, for the most part, the tariff classification of products should be identical in both the UK and Ireland.
The UK version of the tariff is available at HMRC website. The lower digits may refer to particular treatments in particular countries. Where there are no lower digits the default position is that 00 et cetera is used.
The UK has published a special hard Brexit version of the tariff which is available on the HMRC website. The applies a zero rate across many non-agricultural goods. It is said to apply to a hard Brexit only
Getting Tariff Information
Regardless of whether traders make traders’ own customs declarations, or traders provide the requisite information to the carrier traders need to consider the basic information required to be communicated to the logistics provider to complete customs declarations. Much of the information may be available from the commercial invoice.
If traders do Intrastat returns much of the customs information inwards and outwards is available in a basic form. The codes used on Intrastat returns (traders’ obligations to do them would depend on turnover) contain most or all of the customs code as they are based on the same classification system.
Traders should not simply assume traders’ Intrastat returns information is current unless they have a high degree of confidence in the source from which is the original classification was obtained. Because Intrastat returns are not as critical, businesses sometimes use a classification which is technically incorrect.
It is possible to get a binding tariff information ruling from Revenue or HMRC. Traders need to submit detailed information. They may consult with other revenue authorities within Europe. The ruling is definitive and will protect traders from penalties et cetera even if it is overturned at some time in the future. It may be that there is a binding tariff information ruling that exists within the industry for traders’ precise products. Generally, the rulings hold good throughout the EU.
As mentioned, the classification can be undertaken with reference to the tariff, but it is easy to make mistakes. Sometimes there are other categories, which one would not even have considered which are the relevant ones, but which may be described in different language or in some way that is not intuitive.
Other Tariff Possibilities
There is the possibility that the UK and EU might enter an interim agreement under the WTO (World Trade Organisation) rules which allows that its terms may be applied to the states that are negotiating under the agreement for a trade agreement or customs union for up to 10 years. If this was the case, then that differential treatment might be applied by the UK and EU without the risk of a third country business claiming breach of the WTO anti-discrimination principles.
Origin issues would arise in claiming the favourable tariff rates. It would require certification of origin.
Some UK politicians and commentators have placed considerable emphasis on this exception in the WTO Agreement to the imposition of full-term country tariffs. It requires that the two countries are in actual agreement by way of an interim agreement for a future trade agreement. They may apply on a temporary basis zero or other unique tariffs as they wish between them.
However, this arrangement would require the agreement of the EU and provide for a program for a final agreement which could be contested by third countries other WTO agreements. It is argued that the EU might simply prefer to enter a full agreement than an interim agreement.
UK Temporary Tariff
The UK government has published a proposed temporary tariff regime for ano deal Brexit. It has extended the tariff exemption for a wide range of goods at least for a period. The versions that have been published were drafts and rnot necessarily going to become law.
The guidance indicates that if goods classification are not listed they will have a zero duty rate. .
Temporary rates of customs duty (tariffs) on imports after Brexit.
The temporary rates of customs duty (tariffs) on imports if the UK leaves the EU with no deal.
Published 13 March 2019 last updated 29 March 2019 (postponed to 31 January 2020 with an effective exit date on 31 December 2020) — see all updates
From: Department for International Trade
Preferential, MFN and tariff quota rates of customs duty on imports if the UK leaves the EU with no deal MFN and tariff rate quotas of customs duty on imports if the UK leaves the EU with no deal
These documents are drafts. Final versions will be uploaded with the legislation, which is subject to Parliamentary approval. If the UK leaves the EU with no deal, traders may need to pay different rates of customs duty (tariffs) on imports.
If traders’ goods are not listed, they will have a zero duty rate (tariff).
If traders need to pay customs duty, the rates (tariffs) could vary depending on where traders import traders’ goods from.
Preferential tariff rates
If a preferential tariff rate applies, this is the rate of customs duty traders will pay.
Most Favoured Nation (MFN) tariff rates
If a preferential tariff rate does not apply, this is the rate of customs duty traders will pay.
Some goods have an asterisk (*) in the ‘Tariff rate’ column instead of the Most Favoured Nation (MFN) tariff rate. In this case, to find the MFN tariff rate traders’ll need to:
Tariff rate quotas of duty
If a tariff rate quota applies, traders can apply to import a limited amount at a reduced rate of customs duty.
Customs valuation is generally based on the sale price but in principle, HMRC or Revenue might apply a different price if it believes that the pricing treatment is incorrect. Because traders have group purchases and sales in some case, they might be looked more closely at by HMRC and Revenue, than an arms’ length sale.
The primary method of valuation is with reference to the invoice price. Some deductions may be permissible if they are clearly distinguished, such as cash trade and quantity discounts. Customs charges whether or not included in the price are generally included for customs duty purposes to the extent they relate to importation expenses. Value-added tax is applied to and added on top of the customs value.
The transaction value may be accepted where the importer demonstrates the value approximates to a transaction occurring at the time of importation between unrelated buyers in respect of identical or similar goods which has been determined under an appropriate method.
Valuation Declaration Forms
HMRC may request a value declaration. UK HMRC practice and valuation are here. https://www.gov.uk/government/publications/notice-252-valuation-of-imported-goods-for-customs-purposes-vat-and-trade-statistics/notice-252-valuation-of-imported-goods-for-customs-purposes-vat-and-trade-statistics
On the Irish side, a valuation declaration must be completed for every import consignment with a value in excess of €20,000 except where the:
- import is not commercial
- duty payable is not based on the value of the goods
- goods are liable to Value-Added Tax (VAT) only and the importer is registered for VAT
- goods are fruit and vegetables valued by the ‘unit price’ system.
Alternatively, a long-term declaration can be registered instead of a separate declaration for each import consignment for three years. The Origin and Valuation Unit of Revenue deal with valuation issues and may be in a position to assist. The form of valuation declaration is on the Revenue website