Policy paper

Tax Information and Impact Note for the UK Tariff 2019

Published 13 March 2019

This policy paper was withdrawn on 25 September 2020

This guidance has been withdrawn because the regulations and associated documents it links to were prepared for a no-deal Brexit on 31 January 2020.

Find more information about UK transition legislation from 1 January 2021.

1. Who is likely to be affected

This policy will directly affect those who import goods into the UK, changing the rate of some import duties charged. It could affect indirectly all consumers through changes in prices and many domestic businesses by changing access to the UK market for some imports.

2. General description of the measure

This measure will establish and give effect to a UK tariff, which will set out the rules governing the classification of goods, and contain rules for determining the amount of duty applicable to those goods ^{[footnote 1]}. This measure will take effect only if the UK leaves the EU without an agreement, and will set the level of import duty for all goods. In line with the World Trade Organisation (WTO) Most Favoured Nation (MFN) principle, these tariffs will apply to all trading partners and with whom the UK has no alternative agreements such as Free Trade Agreements, other Regional Trading Arrangements or preferential access scheme such as that for developing countries.

The measure will set the majority of import duties at 0% for a temporary period, of up to 12 months, except for products deemed most sensitive to adjustment costs ^{[footnote 2]} from international markets or important for strategic considerations (detailed further in the economic impacts section). In addition, the package of statutory instruments that give effect to the UK Tariff will:

• continue to provide preferential rates for goods originating in countries with which the UK has a free trade agreement;
• continue to give developing countries unilateral preferences on trade with the UK;
• where import duty is not set to 0%, in some cases allow for a reduced or zero rate of duty for a limited quota of goods over a given period;
• maintain a range of reductions in import duty in specific circumstances;
• maintain existing EU countermeasures in response to US imposition of increased tariffs on certain steel and aluminium products (“safeguards”).
• set rules for determining the origin of goods where necessary for the purposes of determining the amount of import duty that should apply.

3. Policy objective

In a no deal scenario, the aim of this package is to mitigate some of the economic impacts to the UK from increased costs of imports from the EU for businesses and consumers. Broadly, the classification of goods will remain the same, to provide continuity to businesses who currently interact with this system in order to minimise disruption. However, we recognise that in the event of no deal there is no status quo option for our import duty ^{[footnote 3]} policy.

The Most Favoured Nation (MFN) principle of the World Trade Organisation (WTO) requires that all WTO-member trading partners be charged the same import duties. Limited exceptions are allowed, for example, for countries with whom there is a Free Trade Agreement, other Regional Trading Arrangements such as Customs Unions or special access for developing countries. This means that the UK would, under MFN rules, be required to apply the same rates of duty on a good from the EU as from any other nation with which it does not have a preferential arrangement in place.

In no deal, the duties charged on imports from the EU will be in accordance to the MFN principle. The Tariff ^{[footnote 4]} proposed in this policy looks to mitigate price impacts that would otherwise arise due to the imposition of tariffs on imports from the EU that used to be tariff-free; avoid excessive business and employment adjustment costs stemming from liberalisation or the imposition of tariffs; safeguard the UK’s strategic interests; and reduce the impact on trade with poorer developing countries. This policy will initially be set for a period of up to 12-months. Within this period the government will consult on the long-term policy options and subsequently set new rates via revised secondary legislation.

The package of statutory instruments also provides continuity with regards to goods from those countries with which the UK has maintained free trade agreements, and for developing countries for which the UK unilaterally provides preferences. These will last beyond the planned initial 12-month period, consistent with the UK’s international commitments. Where currently reliefs are due to last beyond the 12-month period this package provides for such longer-term policy. This package also maintains the EU’s countermeasures in response to the US steel and aluminium safeguards. These countermeasures are retained to continue the rebalancing of suspended trade concessions and to deter similar actions.

4. Background to the measure

In the event of a no deal exit from the EU, the UK will be required to set its own trade policy. The Taxation (Cross-border Trade) Act 2018 gives powers for HM Treasury to set a Tariff on the recommendation of the Secretary of State.

5. Detailed proposal

5.1 Operative date

In the event the UK leaves the EU in a no deal scenario, the measure will have effect on all imports from that moment.

5.2 Current law

Currently the main provisions governing the Tariff for the UK are set out in directly applicable EU regulations. Council Regulation (EEC) No. 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff, as amended (most recently by Council Regulation (EEC) No. 2018/1602) forms part of a body of EU legislation known as “Customs Legislation”, which sets out the overarching legislative framework for customs adhered to by all Member States.

When the UK leaves the EU and paragraph 1 of Schedule 7 to Taxation (Cross Border Trade) Act is commenced, to the extent that these EU regulations (which will form part of the law of the United Kingdom as a result of section 3 of the European Union (Withdrawal) Act 2018) impose or otherwise apply in relation to any EU customs duty duty, they will cease to have effect unless otherwise provided for under Part 15 of the Customs (Import Duty) (EU Exit) Regulations 2018.

5.3 Proposed revisions

This will be the first time the powers in the Taxation (Cross Border Trade) Act 2018 have been used to establish an independent UK tariff schedule, should the UK exit the EU without a deal.

6. Summary of impacts

6.1 Exchequer impact (£m)

In the event of a no deal scenario, full estimates of the exchequer impact will be produced and will be set out at a later date subject to scrutiny by the Office for Budget Responsibility.

As a member of the EU Single Market and Customs Union, the UK collects customs duty on behalf of the EU. Currently, 20% of this duty is retained by the Exchequer to cover the cost of collection, and 80% is remitted to the EU as “traditional own resources”; this, alongside other components in the terms of reference for contributions, is how the EU raises income. In 2017-18, HMRC collected £3.4 billion in customs duties (approximately 80% of which was remitted) ^{[footnote 5]}.

If the UK leaves the EU without a deal, the UK would retain all of the customs duty it collected. It would also, under MFN rules, be required to apply the same rates of duty on a good from the EU as from any other WTO-member nation with which it does not have a preferential arrangement in place.

Products whose duties have been set to zero will not generate any revenue whereas those that are imported at a non-zero tariff rate will generate some revenue. The overall amount of revenue generated will depend on many factors, including how the applied duties change consumer and producer behaviour. For instance, high duties on goods may not generate much revenue if the impact is to significantly reduce demand, i.e. the duty may be so prohibitively high that the good is not imported at all.

6.2 Economic impact

Overall, in the event of no deal, there are likely to be negative supply and demand side impacts to the UK economy resulting primarily from increased barriers and costs to trade with the EU and wider macroeconomic developments that could impact prices. One way to mitigate part of the supply side impact is to liberalise the UK’s tariffs on the majority of imported goods for a temporary period of up to 12 months. It is important to note that tariffs are one of many barriers to trade and will not be the sole driver of change in the UK economy.

The EU MFN tariffs on industrial goods are generally far lower than on agri-food products. The government’s previous analysis estimated that, if UK and EU imposed current MFN rates at the current EU-applied levels, on average additional tariffs on manufactured goods would be equivalent to 3% of the value of trade, and for agri-food, it would be 20% of the value of trade ^{[footnote 6]}.

This policy sets tariffs on approximately 95% of tariffs lines to 0% ^{[footnote 7]} for a temporary period of up to 12 months. Based on average 2017 to 2018 trade flows, this amounts to approximately 87% of imports by value ^{[footnote 8]}. This includes the following:

• 70% of imports (by value) and 57% of tariff lines that currently have a 5% or below EU MFN tariff;
• of which 42% of imports (approximately £200 billion) and 26% of tariffs lines are currently EU MFN tariff free ^{[footnote 9]}

Such tariff liberalisation removes one of the new costs of imports and thus mitigates the extent of upward pressure on prices in the short term.

While this policy is temporary and does not comprehensively liberalise tariffs, external literature and cross-government analysis highlights the positive macroeconomic benefits of eliminating all import tariffs ^{[footnote 10]} , particularly in reducing consumer prices and boosting GDP. Government’s long run analysis ^{[footnote 11]} highlights that there is a 0.8% positive impact on GDP from unilaterally liberalising all tariffs compared with a scenario in which the UK leaves the EU without a deal and imposes existing EU MFN tariffs on all imports.

In this policy, some of the benefits of liberalisation are likely to be felt even in the short run, such as increased competitiveness from reduced tariffs on intermediate inputs. Changes to taxes, including tariffs, tend to feed through to prices relatively quickly ^{[footnote 12]}. Broadly and suddenly imposing new tariffs on previously tariff free trade with the EU is likely to lead to higher prices. By liberalising the majority of tariffs on imports with the EU, it is expected this will avoid some upward pressure on prices. Some of the wider impacts of liberalisation, such as increased competition causing reallocation of resources to more productive industries, feed through overtime. It is possible that this effect will not be seen in some sectors for the duration of this policy. In other sectors, these impacts may feed through faster and could lead to adjustment costs.

The impacts of this policy could differ by UK region. Regional impacts are likely to depend on each region’s dependence on the goods sectors and in turn their dependence on imports. Regions least dependent on imported goods for production purposes, such as London, are likely to be less impacted by this policy whereas other areas more dependent on imported goods, e.g. North East of England, could be more impacted. The scope for a tariff shock is likely to be mitigated for areas that heavily import goods from the EU. Some goods that were historically protected from import competition may face further import competition. The impact on consumer prices from liberalising tariffs is likely to be felt across all regions of the UK. Regional impacts of unilateral liberalisation have been highlighted in a study by UK Trade Policy Observatory ^{[footnote 13]}.

Tariffs will remain on goods where the potential adjustment costs for businesses or developing countries are expected to be high, relative to any negative impacts on consumer prices. Goods where some tariff will remain include the following areas:

• Sensitive agricultural products, where EU level MFN tariffs are high, and a move to zero tariffs would go beyond what is necessary to ensure that prices do not rise excessively compared with the status quo. For these sectors, MFN tariffs will be reduced, and (for some products) additional First Come First Serve Tariff Rate Quotas (TRQs) will be introduced, to ensure the impact on consumer prices remains relatively neutral. However, changes in market dynamics will continue to affect the relative price of these products.
• For sheep meat, current EU MFN tariff-levels will be applied on imports to reduce adjustment costs faced by the sector. Adjustment costs are a particular concern in this sector as the EU has very high import tariffs and the UK is a net exporter to the EU. Therefore, the loss of the EU export market may push produce back to the domestic market – thereby depressing prices.
• On a small number of lines, it is necessary to protect the value of developing country preferences such as apparel, certain agricultural products (including sugar and fish products). Non-zero MFN tariffs will be retained on relevant lines where products are largely imported at zero or a reduced tariff under the Generalised Scheme of Preferences (GSP) or other preferential trade arrangements. The UK has already agreed to continue to maintain these preferences. Where the UK imports significant amounts of such goods from the EU, the prices of these goods are likely to rise (although, the policy aims to filter out the lines where this is most pronounced). Charging tariffs on imports from the EU could increase the value of preferential access for developing countries to the UK market.
• Existing EU countermeasures in response to steel and aluminium safeguards have been maintained on a range of products. The countermeasures increase the cost of importing these products from the US. This could induce consumers and users to switch to alternative suppliers or to reduce their consumption. This would reduce US exports of these products to the UK.
• Goods where an existing EU trade remedy measure is being maintained on exit will retain an MFN tariff at the same rate as the EU applied MFN rate. This is because reducing or removing MFN tariffs on these goods could expose producers to adjustment costs, potentially based on unfair competition. However, in many cases a large proportion of these goods are imported from the EU currently. Therefore, imposing tariffs on imports from the EU may push up prices of these goods.
• Tariffs have been retained on finished vehicles, including cars, goods vehicles, road tractors, buses and motorcycles. These goods are likely to face high tariffs in export markets, particularly the EU where finished vehicles are some of the highest amongst industrial goods sectors. The automotive vehicles sector is highly export intensive and this will negatively affect UK exports. Retaining UK tariffs will help put this strategically important sector in a better position in the domestic market. The more cautious approach on automotive vehicles takes into account broader market developments surrounding the sector, and it is in line with their treatment in previous Free Trade Agreements where tariffs are eliminated slowly to avoid sudden market disruption whereas most other industrial products are liberalised much faster. This is likely however to put upward pressure on prices. However, in line with the broader approach to intermediate goods, tariffs on Automotive components – including engines - will be lowered to 0% for the duration of the 12-month period. This is intended to avoid imposing import tariff costs on UK manufacturers, given the highly integrated nature of UK-EU supply chains.

6.3 Impact on individuals, households and families

In the event of no deal, the overall price impacts will be driven by tariff policy and factors other than tariffs. For instance, custom checks and procedures as well as other non-tariff barriers will be applied to trade with the EU which will add costs to imports from the EU. Additionally, wider macroeconomic developments could also be major drivers of price changes if there is no deal. These factors would put upward pressure on prices that would mean that imports become more expensive, which could limit the competitive position of imported goods in the domestic market. The EU is the largest source of imports for the UK, so the consumer price impact is expected to be broad based and UK/EU supply chains are likely to become more costly. Imposing tariffs on imports from the EU will put further upward pressure on prices. Tariff liberalisation will dampen the upward pressure on prices.

This is particularly acute in food and agricultural products where tariffs are far higher than in industrial products. Therefore, the greatest relative benefit of this policy will be mitigation of price increases in food and agricultural products. Those on lower incomes are more sensitive to price increases, and in particular, food takes up a relatively larger proportion of total expenditure for poorer households ^{[footnote 14]}. The mitigation of price rises in a no deal scenario will be to the benefit of all consumers particularly those in lower income brackets. This measure is not expected to have an impact on family formation, stability or breakdown.

7. Equalities impacts

We have considered the impact of tariff liberalisation against the nine protected characteristics: age, disability, gender assignment, pregnancy and maternity, race, religion or belief, sex, marriage and civil partnership, and sexual orientation.

The purpose of the policy, is to mitigate price spikes and business adjustment costs in a no deal scenario. By extension, the intention is to mitigate any detrimental impacts that may be suffered particularly on individuals with protected characteristics. However, it is important to emphasise that there are many uncertainties in a no deal scenario; and, therefore, limitations to the extent to which we can predict the full impact of this temporary policy. It is therefore possible that that there will be unintended consequences and there is an associated risk that these may have a disproportionate impact on individuals with protected characteristics, which is why we will keep any impacts under review

There is a risk that some sensitive sectors will suffer business adjustment costs as a result of rest of the world competition following liberalisation. This could have a consequential impact on individuals employed in these sectors. However, we do not have evidence to suggest that such business adjustments will disproportionately impact individuals with protected characteristics.

With regards to increased prices as a result of tariffs being applied to EU trade, the application of tariffs to finished automotive imports may temporarily increase the price of vehicles including cars. While this will apply equally to all motorists, it may have a disproportionate impact on individuals with certain protected characteristics. For instance, people with disabilities may be more reliant on cars and therefore be more adversely impacted by price increases. However, this is mitigated by the fact that the policy is temporary. Further, the liberalisation of tariffs on intermediate goods for automotive manufacturers will help keep prices down; and may even open up cheaper supply chains.

In the event of no deal, UK agricultural producers will face tariffs on exports to the EU (which will tend to depress some UK prices, especially for sheep meat as highlighted in paragraph 23). The imposition of MFN tariffs on agricultural imports from the EU is intended to take this and other relevant factors into account and mitigate excessive prices rises at the point the tariffs are introduced. However, there are inherent uncertainties in setting any tariff, and there may well be an impact on the price of certain foods. Individuals with protected characteristics are disproportionately in the lower income brackets, where food takes up a relatively larger proportion of expenditure ^{[footnote 15]}. Therefore, there is some risk that any inflationary impact from agricultural tariffs results in a disproportionate impact for those with protected characteristics. However, this is mitigated by the fact that the policy liberalises many agri-food products and that autonomous TRQs (e.g. for beef and poultry meat, with zero in-quota tariff rates) will be introduced alongside the new MFN tariff allowing, for example, time for logistics and contracts to adjust.

8. Impact on business including civil society organisations

The impacts on businesses stemming from this policy will depend on firms’ reliance on imports from the EU and the extent to which they are already exposed to competition from the rest of the world. For some businesses, there will be an upside in terms of not having tariffs imposed on imports from the EU (as is currently the case), particularly where businesses rely on EU goods as inputs or as final goods for sale. Equally businesses can now also access a larger number of goods from the rest of the world without the cost of a tariff being imposed. However, for other businesses, lowering the UK’s tariffs could expose them to greater levels of competition from the rest of the world, which may create greater adjustment costs for these firms and their employees and may ultimately result in firm closures and the loss of jobs.

The fact this is a temporary policy will potentially have implications for the speed at which businesses adjust their operations and the overall benefits and costs of the policy. There is likely to be greater competition in some sectors, even in the short run, which could help incentivise businesses to be more efficient – generating productivity gains. Similarly, business might look to the development of a longer-term MFN tariff policy before making decisions over their operations and investments and may be able to withstand any impacts stemming from a change in tariffs and no deal. Some may also be able to easily switch between sourcing goods from the EU to the rest of the world, but even that is likely to come at some cost as contracts and supply chain arrangements are amended. Others, however, may not be able to adjust so easily in terms of maintaining overall production and employment, and may need to scale back their operations quickly in light of greater competition in the UK market due to lower tariffs, as well as broader trade barriers in a no deal situation. This includes the fact that UK exports will now face the EU’s MFN tariff.

To mitigate excessive business adjustment costs, the policy exempts certain sectors from full liberalisation such as certain agricultural products and industrial goods (see paragraph 23). For some products, mitigating adjustment costs through positive MFN tariffs could lead to consumer price increases. For example, domestic finished vehicle manufacturers could benefit from the increased barriers to imports of finished vehicles. This will increase domestic manufacturers’ competitive position in the UK market relative to foreign traders. This will also be in addition to finished vehicle manufacturers benefitting from the policy’s intended outcome of maintaining zero tariff imports of intermediate goods - including automotive components – to support industries with international supply chains. However, these benefits need to be balanced with additional administrative and non-tariff costs added on UK/EU trade in a no deal scenario through, for example, customs procedures ^{[footnote 16]}.

Unlike access to tariff free imports under an FTA, the broad tariff liberalisation reduces the cost and burden of needing to prove preferential rules-of-origin. Additionally, firms dependent on inward processing relief for their intermediate inputs may also benefit from the removal of these administrative burdens. This is likely to help Small and Medium Enterprises dependent on imports as they who are less likely able to utilise preferences due to costly administration. The administrative burden will remain for those companies looking to import products exempt from liberalisation.

There will also be a significant administrative burden for businesses to familiarise themselves with key operational issues related to the Tariff such as tariff rates, the classification of goods and declarations system. This will include a requirement to update the required software which may incur further costs for businesses. This will be particularly high for the 245,000 ^{[footnote 17]} EU-only traders. Moreover, the cost of investing to develop tariff expertise will be relatively higher for smaller businesses. For businesses regularly importing goods that may be subject to a tariff, there will be additional on-going declaration burdens.

Further information on administrative and customs issues are assessed in the “HMRC impact assessment for the movement of goods if the UK leaves the EU without a deal ^{[footnote 18]}”.

No distinct impacts are expected on civil society organisations.

9. Operational impact (£m) (HMRC or other)

HMRC is responsible for the administration of the UK Trade Tariff. HMRC will require short term resource to effect the changes necessary to implement the new UK Tariff. These costs form part of the wider cost of EU exit, and are not calculated separately. Additionally, government departments will also require resource to replicate EU functions for setting the tariff.

10. Other impacts

For developing countries which are highly reliant on the UK market and do not have the resilience to cope with trade shocks, tariff liberalisation could cause significant disruption and economic harm. In previous periods of liberalisation, we have observed how quickly import sources can change, especially as developing countries tend to produce goods with few barriers to trade that are highly competitive. Therefore, even if the MFN reduction is only temporary this may lead to a reduction in imports from developing countries, impacting on firms that rely on these specific supply chains and affecting civil society organisation representing the interests of developing country producers. Retaining the current EU MFN tariffs on some products from developing countries therefore reduces the risk of developing countries falling out of global supply chains. Where developing country preferences are not retained some countries will see the value of their preference eroded but have tariff free access to the UK market due to the broad tariff liberalisation.

11. Monitoring and evaluation

This policy is intended to be temporary and to last up to 12 months. The Government will also launch a formal consultation on a long-term tariff policy in the interim to get representation from impacted parties. There will also be a review mechanism in-built for businesses to offer their views on the impact of the policy.

12. Further advice

If you would like additional information about classification of goods, please see further guidance on finding commodity codes for imports or exports.

If you have any questions about this policy, please contact DIT’s EU Exit Enquiries Centre.

13. Declaration

The Rt Hon Mel Stride MP, The Financial Secretary to the Treasury and Paymaster General has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.

1. There are 11 associated Statutory Instruments covered in this Tax Information and Impact Note including, The Customs Tariff (Establishment) (EU Exit) Regulations; The Customs (Origin of Chargeable Goods) (EU Exit) Regulations 2019; The Customs Tariff Preferential Trade Arrangements Regulations; The Customs (Tariff-Free Access for Goods from Overseas Territories) Regulations; The Customs (Tariff Rate Quotas) Regulations; The Customs (Origin of Chargeable Goods: Trade Preference Scheme) (EU Exit) Regulations; The Customs (Reliefs from a Liability to Import Duty) (EU Exit) Regulations; Trade Preferences Regulations; Developing countries (Transitional Protection) Regulation; The Customs (Import Duty Variations) (EU Exit) Regulations; The Tariff Rate Quota (Licensing) Regulations. ↩

2. “Adjustment costs” refers to new costs related to the change in import duties of products. ↩

3. “Import duty” and “tariff” are used synonymously in this document. ↩

4. “The Tariff” refers to the complete schedule of import duties (or tariffs), Tariff Rate Quotas and related measures applied. ↩

5. HMRC published receipts ↩

6. See HM Government (2018), EU Exit: Long-term economic analysis, Section 2.3.2. ↩

7. Calculated using 8-digit harmonised system (HS) product codes from the tariff line nomenclature. This can be found on the World Trade Organisation Analysis Online tool. ↩

8. Calculated using average import values between 2017 and 2018 based on HMRC data and calculates the percentage of trade that will not be subject to any MFN tariff. Note these figures are static and do not represent dynamic impacts as a result of the change in tariff regime. Tariff rates have been taken from Market Access Maps, Ad Valorem Equivalent calculations as of 2017. ↩

9. Data sourced as outlined in footnote 8. Note however that the figures outlined in the bullet points exclude imports only allocated at the 2-digit HS level such as, for example, imports not subject to intrastat declarations. ↩

10. See UK Trade Policy Observatory and Resolution Foundation (2017), Changing Lanes: The impact of different post-Brexit trading policies on the cost of living; Dhingra, Ottaviano, Sampson and Van Reenen (2016), The consequences of Brexit for UK trade and living standards. Open Europe (2018), No Deal: The economic consequences and how they could be mitigated. ↩

11. HM Government (2018), EU Exit: Long-term economic analysis, Section 4.9. ↩

12. See Bank of England (2018), EU withdrawal scenarios and monetary and financial stability. ↩

13. See UK Trade Policy Observatory and Resolution Foundation (2017). ↩

14. See National Institute Economic Review (2018). ↩

15. See National Institute Economic Review (2018). ↩

16. Further information about these can be found. ↩

17. See HMRC impact assessment for the movement of goods if the UK leaves the EU without a deal (first edition). ↩

18. See HMRC impact assessment for the movement of goods if the UK leaves the EU without a deal (first edition). ↩