TSE – As Marks and Spencer warns of Brexit nightmare, what are these Rules of Origin red tape issues?

arks and Spencer today warned the Stock Exchange that its stores in the EU had been hit hard by complicated new Brexit tariffs.

The government trumpeted its exit deal as creating tariff-free trade between the UK and Europe. But M&S and other retailers say they are being caught with big taxes due to so-called Rules of Origin.

What are Rules of Origin?

UK-made goods exported to the EU are tariff-free, as if we were continuing to be in the EU. 

However, what constitutes “UK-made goods”?

If a dress is made for a British retailer in Bangladesh, it is a Bangladesh-origin product, so is subject to tariffs. Fair enough.

Where it gets complicated is where a UK factory processes raw materials from abroad and then exports the finished item. Is the item British, or a “re-export”?

Let’s take a box of dates.

If a UK factory working for M&S simply takes the stone out of the dates then exports them to the M&S store on the Champs Elysee, they will be liable for a tariff. Not enough processing has happened in the UK to make them qualify for exemption.

But if the date is stoned, chopped up and used in a marinade for a ready meal, it is deemed a UK made product and is tariff-free.

Dates are generally imported from the Middle East, so you can sort of see why the EU might want tariffs applied.

Where it gets crazy is where EU-made goods can also be liable when exported back into the EU. 

For example, if a UK food manufacturer grates by hand some Emmental cheese into a product, the cheese would be liable to EU tariffs when exported back because it is not deemed “transformed enough”. If it is grated by a machine, it is tariff-free.

The amount of non-UK stuff permitted can also vary from item to item. 

On dairy goods, you’re allowed 20%,  on white chocolate it’s 40%. If it’s a smoothie, the milk will carry one percentage cap and the various fruits another.

The rules also vary if ingredients come from the EU or further afield.

How widespread is the problem?

Huge. All food and drink exporters are wrestling with it this week, having hoped the Government would have been able to get a more comprehensive deal.

But, of course, it’s not just on food. Materials, textiles, advanced manufacturing, chemicals, cars and electronics are all hit.

Retailers with stores on the continent are among the worst affected, particularly the many who have stores in Ireland which were often seen largely as an extension of their UK operations.

The British Retail Consortium says at least 50 UK shop chains are struggling with the problem.

Companies are trying to find workarounds, but the problem seems sticky. John Lewis and TK Maxx have suspended deliveries to Northern Ireland, which also has to follow EU customs rules, while they try and figure it out.

Exporters have to be able to provide evidence to prove the origin of their products’ ingredients. Next year, they will also have to provide suppliers’ declarations too, and EU officials may demand those retrospectively, so exporters need to have them now.

Next is looking to use bonded warehouses, which are tax and duty exempt, for its exports. 

Other companies are considering setting up factories or distribution hubs in the EU to supply their shops there. But that is expensive. Cynics say the EU would not complain at all if British firms had to invest in new operations there.

Exporters have to be able to prove where their products ingredients are from. Next year they have to provide documentation, too, and EU officials may demand that retrospectively, so they need to have the information ready now.

That means companies are scrambling to work out the origins of all the products in their supply chain.  

In the car industry, electric vehicles and hybrids buy nearly all their batteries from Asia, which would push UK-made cars over the normal cap for tariffs.

The two sides have agreed to allow a higher non-UK or non-EU ratio for a few years to encourage the industry to make batteries in the UK and the EU. The cap falls from 60% to 45% in 2027.

How are businesses feeling?

That varies from industry to industry. Carmakers seem fairly relaxed having had been cut a break on the batteries issue. 

The British Retail Consortium less so. William Bain, its trade policy adviser, says the current rules don’t reflect the genuine needs of UK-EU supply and distribution chains.

Plenty. One retailer has just discovered that if they ship their goods in an individual package it is tariff free as long as it’s worth under e150. But each item has to have its own export documentation.

If they ship in bulk to save on the paperwork, they lose the tariff waiver because the total value goes up through the e150 exemption.

However, exporters look at it, the red tape, timewasting and added costs are huge.