United Kingdom Government has announced a new Developing Countries Trading Scheme (DCTS), which will replace the current Generalised Scheme of Preferences (GSP) from 19 June 2023. The new scheme allows goods that originate in Less-Developed Countries (LDCs) to be imported into the UK at reduced or nil customs duty rates. As with GSP, to benefit from these preferential duty rates at import, the DCTS requires that these imported goods meet specific rules of origin and comply with the requirements of the agreement.

Like GSP, DCTS has three tiers of countries. On the first tier are LDCs; the second tier consists of countries classified by the World Bank as a low-income (LICs) or lower-middle income countries (LMICs); and the third tier includes countries that are economically vulnerable LICs or LMICs due to a lack of export diversification.

There are some important differences in the new agreement that taxpayers should note. These include:

1. Simplified Product Specific Rules (PSRs) specifically designed for LDCs, making them easier for businesses to understand and use
2. Expanded cumulation for LDCs, enabling them to have extended cumulation with other DCTS countries and countries with Economic Partnership Agreements with the UK; this reduces trade barriers for LDCs in regional and global supply chains serving the UK
3. Additional 156 products eligible for tariff reductions and more than 85% of eligible goods now benefit from zero-rated tariffs in the DCTS Enhanced Preferences (including tomatoes, olive oil, animal feed and pet food ingredients)
4. A revised basis for goods’ graduation from the scheme to ensure that only genuinely competitive goods are phased out of the scheme
5. The renaming of preference tiers from GSP to DCTS to align with the UK's offerings in each tier and reflect the progression of countries as their economies grow:
• DCTS Comprehensive Preferences (previously GSP LDC Framework)
• DCTS Enhanced Preferences (previously GSP Enhanced Framework)
• DCTS Standard Preferences (previously GSP General Framework)

Under the new agreement, access to the enhanced preferences is based purely on the economic vulnerability of LICs and LMICs, which is considered to be a more generous approach, with eight countries becoming immediately eligible for enhanced preferences. The DCTS retains power to suspend any country that violates human rights or labor rights. In addition, this power has been broadened to include violations in relation to anti-corruption, climate change and environmental conventions.

Overall, the DCTS appears to offer more generous benefits than the existing GSP. Any business currently utilizing GSP should review the application of the DCTS frameworks.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), Indirect Tax

• Penelope Isbecque, Leeds | pisbecque@uk.ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor