EU and UK agree rules of origin agreement to avoid tariffs on EVs

The UK Government has finalised a deal with the EU to extend trade rules on electric vehicles (EVs) until the end of 2026.

This agreement will postpone ‘rules of origin’ requirements and the imposition of 10% tariffs on EVs.  

The move is expected to save car manufacturers and consumers up to £4.3 billion in additional costs over the next three years.

The Society of Motor Manufacturers and Traders (SMMT) had warned that battery electric vehicles (BEVs) made in the EU could be hit with a £3,400 tax hike when sold in the UK if new rules of origin were implemented in January.

Mike Hawes, SMMT chief executive, said: "Deferring the rules of origin is a win for motorists, the economy and the environment. Maintaining tariff-free trade in EVs will ensure consumers retain the widest and most affordable choice of models, at a time when we need all drivers to make the switch.

"Governments have listened to the sector and acted to safeguard the competitiveness of the EU and UK automotive industries and give the Anglo-European battery industry the critical time it needs to catch up. The measure will help cut carbon, support growth and jobs, and is the right decision for the decarbonisation of road transport."

The UK-EU Trade and Cooperation Agreement (TCA) temporarily exempted electric vehicles (EVs) from the rules that said products must be substantially made in Britain or the bloc to qualify for the EU’s zero tariff, zero quota regime, because EV batteries are predominantly imported from Asia.

The tariff exemptions, which were agreed as part of the Brexit deal, were due to end from January 1, 2024.

Under the more restrictive rules the only way to avoid these duties would be to source all battery parts and some critical battery material in the EU/UK, which manufacturers say is practically impossible to achieve today.

The SMMT, alongside its EU counterparts, has warned consistently of the threat tougher locally sourced content requirements would pose to the industry on both sides of the Channel, if applied from 2024.

While the industry has invested billions in EV production both in the UK and EU, local battery supply needs more time to expand to meet demand.

Jon Lawes, managing director at Novuna Vehicle Solutions and MHC Mobility, said: “This breakthrough is a lifeline for the UK and European motor industry. The Rules of Origin tariffs have cast a long shadow over the switch to EVs in the UK and Europe. With UK EV registrations declining in November, the rules threatened to further hit vehicle production costs and dampen EV adoption. 

“With the New Year’s cliff edge averted, the industry and policymakers on both sides of the Channel need to focus on scaling up domestic battery capacity and tackling the persistent charging infrastructure deficit to create a sustainable, competitive market for EVs.”

Tim Buchan, chief executive officer at Zenith, also welcomed the postponement. “As a business, we are fully committed to the Government’s transition to battery electric vehicles, helping thousands of drivers to make the switch every year. Our funded car fleet is already made up of 45% BEVs," he said.

“We hope the industry can use this time to collaborate and work towards improving our local supply chain ready for 2027.”

Nick Williams, managing director of ​Lex Autolease, part of Lloyds Banking Group​, added: “Longer term, the direction is clear that the UK will become an optimal place to build both vehicles and batteries to counteract the impact of any tariffs after the three-year period. This will also help to ensure that industry and business can continue to plan effectively for an electric future and drive down costs for consumers.”

The UK will also look to agree to extend the equivalent rules of origin in the UK-Turkey preferential trade agreement ready for the end of the year, in a further boost for UK car companies who are major exporters to the Turkish market, such as Ford. This will ensure the existing rules of origin will last for a further three years until the end of 2026, and comes as the UK looks to start negotiations for a new modern free trade agreement with Turkey next year.