ROO Has Put Percy Pigs In A Pickle, With Barriers To Trade Not Sweet For Manufacturers

As the implications of the Brexit deal begin to sink in, lawyers have warned that it is in the interest of both UK and EU manufacturers to see issues surrounding Rules of Origin (ROO) resolved.

Lawyers at Irwin Mitchell continue to receive questions from manufacturers concerned about ROO and the impact the changes are already having on trading and established supply chains.

As part of the Brexit Trade and Cooperation Agreement (TCA), there is zero VAT on products that are of UK/EU origin. While good news on the face of it, the rules are causing problems, leaving some manufacturers to consider paying the tax, to avoid the ROO red tape.

One of the aims of ROO is to ensure neither side can buy cheap products overseas, then simply change the label and export tariff-free. The reality is causing a headache for legitimate manufacturers. Not only do they need to prove where components or ingredients come from, but demonstrate what proportion of any product is made up of them.

Simply changing the label or making cosmetic changes is not enough. There must be tangible differences and the rules can be difficult to interpret. Those manufacturers, who can show a product has been sufficiently transformed so it is completely different, may be fine.

The rules have already thrown up surprising problems, with the manufacture of M&S Percy Pigs sweets being one example. Shipping to the UK following manufacture of the sweets in Germany is fine but then shipping to the Republic of Ireland from a warehouse in the UK is a problem.

This is because the product has not been processed enough to count as made in the UK, so a tariff may have to be paid returning them to the EU – despite being made there in the first place.

The concerns over ROO come amid reports of some UK firms who export to the EU being advised to set up subsidiaries in Europe, to avoid some of the current trade disruption.

The advice is not government policy and while affecting UK businesses at the moment, some of the same issues are likely to be encountered by EU exporters to the UK in the months ahead.

Expert Opinion

“Many of the problems that have emerged surrounding ROO are not in the EU or the UK’s interests and highlight the risk of rushing a trade deal including complex legal agreements, without allowing time to review the implications in detail or to consider the potential for any unintended consequences for both sides.

“The pickle Percy Pigs find themselves in come from clauses that, while a standard part of trade agreements, fail to account for the geographical closeness of the UK and EU, or for the supply chains and working relationships that have built up over decades of mutual cooperation.

“The TCA was always going to need to be unique in many respects and while teething problems were inevitable, issues that left are left unchecked harm both sides and risk long term decay.

“We know firms continue to have questions, from do we just pay the standard tariff, to how do we clear/pay the duty, through to issues over registering for VAT in other EU countries.

“HM Revenue and Customs can only advise on UK VAT, so this remains a complex problem for those manufacturers importing and exporting throughout Europe, or relying on components from the EEA that move around as part of established supply chains and the process of manufacture.

“The UK and the EU need to work together in the weeks and months ahead to iron out the issues and re-calibrate some of the rules in ongoing negotiation. It should be possible to arrive at an agreement that allows legitimate manufacturing on both sides to thrive.

“Without solutions to ROO and other non-tariff barriers to trade, the UK risks being less attractive for serving both EU and global markets in the longer term. This needs to be addressed as the UK embarks not just on a new path internationally, but as part of the government’s ‘levelling up’ agenda for the country as a whole.” Sarah Cardew - Partner