Brexit: At last, a Free Trade Deal

Brexit Deal: Imposition of Rules of Origin for goods set to be one of biggest changes for business

Following the news of a Brexit deal, Jonathan Main, VAT and Indirect Taxes Partner at MHA Moore and Smalley, says the agreement is excellent news for business but that businesses need to bear in mind that it does not eliminate the need to address rules of origins and other costly import formalities:

“A Free Trade deal with the EU is very good news, but it does not mean that everything will carry on as it does today. The deal means that there will be no import duties on the movement of goods produced in both the UK and the EU (the so-called ‘origin goods’). This is a massive boost for businesses on both sides. The most significant change businesses will have to navigate will be the rules of origin requirements.

“Unlike a Customs Union, a free trade deal is a bilateral agreement which only allows tariff free movement of goods produced in either the UK or EU. The finer detail of the trade deal will confirm the origin rules, but it may help to provide an illustration. For example, there are commonly three ways to assess the origin of clothing: the production of yarn; turning yarn into fabric; and turning fabric into a finished garment. Unless two of the three stages happen within either the UK or EU, the finished garment will not be a UK or EU origin good and as such will not benefit from tariff free movement between the EU and UK.

“Aside from rules of origin, import formalities will also rear their head. These will add to cost and reduce profit margins. Businesses importing from and exporting to the EU will need to consult with their customers and suppliers and decide who is responsible for import formalities. If the UK business agrees to take responsibility for import formalities, it will be shipping goods DDP (deliver duty paid) to its customers.

“DDP is one of a range of Incoterms, a set of internationally recognised rules which define the movement of goods between supplier and customer, and determine which party takes responsibility for freight, insurance, risk and import formalities on that journey. If a supplier sends goods DDP to its customer, it will have an obligation to register for VAT in the customer’s country, as it will be the ‘importer of record’ in that country. It may also have to appoint a fiscal representative to act on its behalf.

“No matter what the final fine print will look like, businesses in both the UK and the EU will need to adjust to the new way of operating and ensure they fully understand the impact on supply chains and profit margins.”

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In our latest Brexit publication we set out the key points to take-away from the announcement.

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