There are various issues you need to consider regarding customs. This page is about the final consideration – where the goods are deemed to "originate".
The rate of customs duty (tariffs) applied to imports depends on four things:
- the customs value of the goods;
- the category the goods fall into;
- the country they are being imported into; and
- where the goods "originate".
- Many businesses and ICAEW members will need to understand the rules around origin, often for the first time. These rules are complex, and traders may need to obtain professional advice. This page is intended to help you orient yourself and decide where additional research may be necessary. This page does not constitute professional advice.
How can origin can be defined?
It's the "national source" or "economic nationality" of a product
Origin and UK-EU trade
The UK-EU Trade and Cooperation agreement (TCA) means that no tariffs or quotas apply to trade between the two parties – as long as goods "originate" in the other party. Therefore, "origin" will be a key consideration for any businesses moving manufactured goods between the UK and the EU. If the origin of the goods cannot be evidenced satisfactorily, tariffs may apply.
Where a product contains components that originate in different countries then "rules of origin" are used to determine where the end-product is deemed to originate. Rules of origin are product specific and can be complex. They are set out in detail in annexes ORIG-1 and ORIG-2 to the TCA.
The importer will need to evidence the origin of their goods. If origin is challenged, a higher rate of tariff may need to be paid by the importer and penalties may also apply for incorrect declarations. The TCA sets out how origin should be evidenced. It provides two options:
- Self-declaration by the exporter. This is done by the exporter making a simple statement on the commercial invoice or other commercial document accompanying the shipment. There is standard wording for the declaration, set out below. In this case the importer would not be expected to hold further evidence that the goods satisfy the origin requirements. The onus would be on the exporter to provide this evidence to the customs authorities, should it be asked to do so.
- Importers’ "knowledge". The importer can alternatively rely on information they have received that evidences the origin of the goods. This information must be kept for four years.
Further details on these processes and the information requirements for imports to the UK are set out in HMRC guidance:
Statements of origin
Where the exporter provides a statement of origin, it must follow the wording set out in annex ORIG-4 to the TCA. The exporter will be responsible for the correctness of the statement and will need to ensure they have adequate documentation on file to evidence origin. That might include suppliers' declarations, where necessary. Documentation must be retained for four years.
This is the standard text for the statement of origin from annex ORIG-4 to the TCA. The footnotes are also reproduced here for reference, but these do not need to be included.
What does "originating" mean?
There are two ways that goods can "originate" in a country:
- wholly obtained: goods wholly obtained in the exporting country without incorporating inputs from any other country. Typically, this applies to plants, animals or minerals or products manufactured wholly from these originating materials (there is a list in article ORIG.5 of the TCA).
- Substantially transformed: due to the nature of manufactured products they are likely to comprise a variety of components from different sources. The onus is therefore on evidencing that in their manufactured state, the components have been substantially transformed into a new end product in a way that that satisfies rules of origin. The rules are complex and vary depending on the product (see annexes ORIG-1 and ORIG-2 to the TCA). In general however, qualification depends on:
- adding value to the product, the "ad-valorem" rule;
- changing the tariff classification; or
- being manufactured from certain products or through certain processes.
HMRC has provided detailed guidance on how these rules apply:
Some manufacturers will be certain that their products will qualify as originating. That may be because they themselves have carried out processes that sufficiently transform the product to qualify under the rules of origin, because third-party components are less than the tolerances, or because they have only used materials that are wholly obtained. Otherwise a manufacturer may need to rely on a supplier’s declaration that the components used are originating. There is a template for these declarations in the TCA annex ORIG-3 and HMRC provides further guidance:
As a transitional simplification, until 31 December 2021, businesses do not need declarations from business suppliers to be in place when the goods are exported. However, they may be asked to retrospectively provide a supplier’s declaration after this date.
There are special allowances for products that comprise components originating in the other party. A provision known as "bilateral cumulation" allows components originating in one party to be treated as if they originate in the other. The UK-EU TCA allows for full bilateral cumulation. Cumulation also means that any processing carried out on non-originating components in the other party is taken into account in assessing origin.
The TCA sets out a list of specific processes in article ORIG.7 which are considered as insufficient to transform the origin of a product. These include things like ‘preserving operations’ or breaking up and assembly of packages.
Certain resources used in production are disregarded, such as fuel or machinery used in production. These are listed in article ORIG.13 to the TCA.
Some components might be fungible with and indistinguishable from equivalent components from other countries. A manufacturer may therefore have in stock a mixture of originating and non-originating instances of a component. The TCA recognises that it may sometimes be impractical to store such components separately. Therefore, there are specific rules to allow accounting segregation of these components, while the components themselves might be mixed in the stores. These are set out in article ORIG.14.
It requires accounting segregation to be applied "in conformity with a stock management method under accounting principles which are generally accepted in the Party". Where this applies, manufacturers will therefore need to ensure that the appropriate inventory records and processes have been established and are operating effectively. The accounting segregation method used cannot result in more materials receiving originating status than would have been the case had the components been physically segregated.
When goods arrive in an importing country, the customs authorities (HMRC for the UK) can ask the authorities in the exporting country to carry out further checks and controls. These can be requested even if the goods are already in free circulation. This is called "subsequent verification". The authorities can ask the importer to pay a "security" sufficient to cover the difference in duty, where the goods are not yet in free circulation.
If a verification check shows that the goods do not qualify for preferential treatment, the importer will lose the benefit of it. HMRC can claim duty from the importer up to three years after import. Equally, excess duties paid can be reclaimed by the importer for up to three years, on presentation of appropriate proof of origin.
Why does origin matter?
The sections above relate to trade between the UK and EU, however, origin is also relevant to trade more widely and the rules of origin can vary in different circumstances. There are several reasons why origin matters which we explain below.
1. Trade is between economies with a Free Trade Agreement, which provides for preferential tariffs. For example, a lower rate of tariff applies to certain exports from Canada to the EU because of the CETA Free Trade Agreement. Access to the preferential tariffs depends on the origin of the goods.
Under the UK-EU Free Trade Agreement, exporters from both the UK and the EU need to evidence that their goods originate in the other party to qualify for the preferential tariff.
2. Trade is from a developing country to a developed economy under the "Generalised System of Preferences" (GSP). Access to preferential GSP tariffs depends on origin.
Normally the World Trade Organisation (WTO) requires the same tariff to be applied to all countries – this is the Most Favoured Nation principle. However, the WTO permits an exception to this rule for trade with developing countries, known as the "Generalised System of Preferences" (GSP). This permits ‘donor’ economies to unilaterally offer preferential tariffs to exports from "recipient" developing countries. There is no requirement for the "recipient" to reciprocate. GSP schemes are not standardised so, for example, although both the US and the EU operate GSP schemes, the conditions for each are different.
The UK is operating its own GSP system from 1 January 2021 (see trading with developing nations). This will provide market access to the same countries as the EU GSP and will replicate the three EU GSP "frameworks".
3. Trade defence measures apply. WTO rules permit countries to take measures to defend themselves against subsidies other countries may provide to exporters. These measures include supplemental tariffs - ‘anti-dumping duties’ - and quotas. Customs authorities use origin to determine whether these measures apply to imports.
The EU’s trade defence mechanism is well established. After transition the UK now makes its own decisions on trade remedies. Further detail is available from the Trade Remedies Investigations Directorate.
4. Public procurement rules may specify origin. The EU, US and 18 other parties have signed the WTO Government Procurement Agreement (GPA) and are therefore committed to open international markets for government procurement. The UK is now also a signatory and therefore has access to government markets in these economies, as far as the GPA affords. Nevertheless, some protectionist or discriminatory measures still persist and therefore rules of origin can be relevant in supplying goods to governments and other public bodies.
For example, EU Directive 2014/25/EU (article 85) regulates procurement for the water, energy, transport and postal services. It allows tenders to be rejected if the proportion of third country products exceeds 50%. This provision is part of the EU/UK negotiations.
Proof of origin
For trade between the UK and EU, the notes above detail how origin should be evidenced. For trade with other countries, the necessary proof of origin can vary. A certificate of origin may be required to claim preferential origin.
Individual Free Trade Agreements may specify how preferential origin is to be proved. For shipments above a certain value (often €6,000), many of the EU’s FTA require form EUR.1 to be submitted. The exporter must get this form signed by their customs authority or a Chamber of Commerce.
Another example is the EU-South Korea FTA. In order to benefit from a preferential rate exporters must be authorised by EU customs authorities (except for shipments below €6,000 in value). They can then self-certify origin on their invoice.
To gain preferential origin for imports from developing countries under the EU GSP, the exporter must make a self-certification using the EU’s "Registered Exporter system" (REX). REX has been progressively introduced since 2017 and replaces the "Form A" that had previously been issued by the exporter’s customs authority.
Binding Origin Information
Because a challenge of origin by customs can have significant financial implications, traders may wish to gain certainty by seeking a ‘Binding Origin Information’ (BOI) decision from customs authorities. A BOI is a written statement confirming the origin of a particular product. EU BOIs are recognised across the EU.
Only the ‘owner’ of a BOI can use it, so a customer cannot share a supplier’s BOI. The proof of origin forms referred to above will still need to be submitted.