Customs and excise quarterly update - August 2022

Welcome to the August 2022 edition of RPC's Customs and Excise Quarterly Update.

News

• New importers are now required to register with the Customs Declaration Service as part of the wind-down of the Customs Handling Import and Export Freight service in advance of its closure for import declarations on 30 September 2022. More details can be found here.
  
  
• The House of Commons Library has published a summary of the changes in trade rules between the UK and the EU.
  
  
• The implementation of revised border control measures has been deferred with no specific date set for their introduction. The measures in question relate to import safety and security declarations, the movement of physical, sanitary and phytosanitary checks from the place of imports' destination to border control posts, and further checks relating, amongst other things, to products of animal origin and animal by-products. Their implementation is now to be tied to the implementation of border import controls targeted for the end of 2023. The government's press release can be found here.

Case reports

 Build-A-Bear Workshop UK Holdings Ltd v HMRC [2022] EWCA Civ 825

Court of Appeal dismisses customs classification appeal

The Court of Appeal (CA) has upheld the decisions of the First-tier Tribunal (FTT) and the Upper Tribunal (UT) and dismissed a customs classification appeal concerning HMRC’s charging of customs duty on accessories to the bears and dolls that the appellant imported into the UK.

Build-A-Bear Workshop UK Holdings Ltd (Build-A-Bear) is the UK branch of an international toy shop that allows customers to choose a 'skin' and create their own stuffed animal toy or doll. The toy can then be dressed up in clothing and accessories including wigs and footwear. Each toy, before being stitched up, has a small textile or plastic heart placed inside it. Build-A-Bear's stuffed toys, the clothing, wigs and footwear have slits in certain items to accommodate animal features like tails and ears.

Between 2012 and 2013, HMRC raised three C18 post-clearance demands in respect of customs duty and import VAT on the basis that Build-A-Bear had improperly declared the import of the toy accessories.

Build-A-Bear argued that these accessories should be classified as accessories of dolls, in which event they would benefit from a nil rate of customs duty. HMRC was of the view that these items should be classified as accessories of stuffed toys and subject to customs duty at 4.7%.

FTT decision

The FTT considered Chapter 95 of the Combined Nomenclature (CN) adopted under Article 1 of EC Regulation 2658/1987 and the appropriate classification of Build-A-Bear's goods. Each item was considered separately, and in the view of the FTT, the goods imported by Build-A-Bear were to be classified as follows:

• Due to their shape and size, the clothing, wigs and footwear were accessories suitable for use principally with stuffed animal toys within the meaning of Guidance note 3 to Chapter 95 (Note 3). They therefore fell within the 'Toys' heading and the 'stuffed' subheading. This attracted a duty rate of 4.7%.
• Plastic and textile items were classified as accessories of dolls only, and therefore fell within the 'Dolls' subheading. This attracted a duty rate of 0%.
• The plastic and textile hearts were stuffed inside the toys and could not be enjoyed in their own right and therefore should be classified as 'Other
• Toys' according to their function as either plastic or textile items. This attracted a duty rate of 4.7% if plastic, and 0% if another material.
• Other animal accessories were to be classified as items in their own right, coming under 'Other Toys'. This attracted a duty rate of 4.7% if plastic, and 0% if another material.

The FTT decision can be viewed here.

Build-A-Bear appealed to the UT on several grounds, including that the FTT had misinterpreted the meaning of Note 3.

UT decision

The UT dismissed the appeal on all but one ground. The UT decided that the FTT had erred in law in its reading of Note 3 and its application to Chapter 95 of the CN.

The UT came to this conclusion on the basis that in reading Note 3 into the wording of the subheadings, the FTT had unduly narrowed the parameters of that subheading. Accessories could fall within the 'Dolls' subheading even if they were not to be used 'solely or principally' with dolls. However, the UT ultimately decided that clothing, wigs and footwear were to remain within the 'Toys' heading and the 'Stuffed' subheading. The duty rate was therefore 4.7%.

In the view of the UT, the FTT's reading of Note 3 led to the hearts being misclassified as independent of the toys and/or dolls. Instead, the hearts should have been classified as accessories under the 'Dolls' subheading, attracting a duty rate of 0%.

The UT allowed Build-A-Bear's appeal in relation to animal accessories, on the basis that the FTT's decision contained an error of law and reclassified the goods as 'Toys other than stuffed toys', attracting a duty rate of 0%.

In addition to Build-A-Bear's appeal, the FTT also heard a cross-appeal from HMRC in relation to the categorisation of imported clothing sets and 'other plastic and textile items'. The UT set aside the FTT's decision that had affected clothing sets, but dismissed the cross-appeal in relation to 'other plastic and textile items'.

The UT decision can be viewed here. You can also read our analysis of the UT decision in our May 2021 update here.

Build-A-Bear appealed to the CA.

CA judgment

The CA dismissed the appeal.

Before the FTT and UT a number of different types of bears and dolls accessories were in issue, but before the CA the dispute was narrowed to three types of accessories that were sold by the company to be used with its bears and dolls: clothes, wigs and shoes (the Items). The key issue therefore turned on whether the Items were 'parts and accessories of dolls', or 'parts and accessories of toys'.

The CA held, among other things, that there was no conflict or tension between the 'Dolls' subheading and the 'Toys' subheading as interpreted by Build-A-Bear. There was no reason for any further disapplication of Note 3. Build-A-Bear's imported Items were solely or principally suitable for use with its stuffed bears, and accordingly, they were classified as 'accessories of stuffed toys'.

This decision resulted in a £660,000 customs duty debt payable by Build-A-Bear to HMRC and will also no doubt lead to additional customs duty charges for the company on importing the Items going forwards.

Why it matters

This decision provides a useful discussion of the customs duty classification rules and brings significant clarity to this area. The decision highlights the complexity and technical nature of the application of the rules to specific products. Importers would be well advised to obtain appropriate professional advice.

The decision can be viewed here.

Amar Fraz v Director of Border Revenue [2022] UKFTT 187 (TC)

FTT confirms Border Force acted unreasonably in refusing to restore seized mobile phones

Amar Fraz (the Appellant) was in business selling used mobile phones. In October 2020, he purchased 30 iPhones from a company in the USA, ARA Global Group (ARA) for $11,010, including carriage. Import VAT and duty of £1,600 was paid on 21 October 2020 by FedEx, who dealt with the importation on behalf of the Appellant.

On inspection, the Appellant found that the iPhones' batteries were degraded, so ARA agreed to replace the batteries for $450. They were shipped back to ARA on 2 November 2020, with a consignment note recording that the customs value was £300.

Following the repair, the iPhones were shipped back to the Appellant, again by FedEx, with a consignment note recording that the customs value was £300 (i.e. the value of the repair, rather than the market value of the goods).

FedEx informed the Appellant that customs were content with the duty status of the iPhones. On 6 December 2020, Border Force seized the iPhones pursuant to section 139, Customs and Excise Management Act 1979 (CEMA), on the ground that they appeared to be undervalued and accompanied by an untrue declaration, and therefore liable to forfeiture under sections 49(1)(e) and 167(1)(a), CEMA.

The Appellant requested restoration of the goods, stating that 'I believe the items listed above should be returned to me because the goods were coming in for repair and the true declaration was made'. He subsequently realised that this initial wording was confused and attempted to clarify his statement. His application for restoration was refused on 10 March 2021, due to the inconsistency, and a review decision refusing restoration was issued on 21 April 2021.

The Appellant appealed to the FTT.

FTT decision

In the view of the FTT, the Appellant was not a reliable or credible witness. It was bound (under paragraph 5, Schedule 3, CEMA) to treat the iPhones as having been duly condemned and forfeited in light of the Appellant's failure to appeal against the seizure to the Magistrates' Court. However, Border Force was required to act reasonably and proportionately in exercising its discretion to restore goods under section 152, CEMA. The documentary evidence available, including the same tracking number being referenced in email correspondence with FedEx, the FedEx consignment notes, and ARA's invoice noting that it had provided a 'battery change service', led the FTT to conclude that it was more likely than not that the iPhones seized were the same ones imported in October 2020. The Appellant had correctly informed his customs agent that the goods were being re-imported following repair. The FTT found as a fact that duty had been paid on the iPhones on their first importation, and that they were potentially eligible for Outward Processing Relief when reimported. The decision not to restore the iPhones was therefore unreasonable and disproportionate. The FTT ordered Border Force to carry out a fresh review of its original decision, taking into account the FTT's decision.

Why it matters

This decision illustrates the circumstances in which, despite procedural irregularities and lack of credible witness evidence in support, a taxpayer may prevail before the FTT in respect of an application for restoration of seized goods.

The decision can be viewed here.

Hare Wines Ltd v Revenue and Customs Commissioners [2022] UKFTT 176 (TC)

FTT finds that HMRC erred in refusing the taxpayer's application for approval to continue as alcohol wholesaler

The FTT allowed an appeal against a decision of HMRC to refuse an application under section 88C, Alcoholic Liquor Duties Act 1979 (ALDA), for approval to carry on the controlled activity of wholesaler of controlled liquor.

Under the provisions of ALDA, Hare Wines Ltd (the Appellant), a wholesaler of alcoholic drinks, had been required to apply to HMRC for approval as a UK wholesaler of dutiable alcoholic liquor. Section 88C(2), ALDA, provides that HMRC may grant approval only if satisfied that the applicant is 'a fit and proper person to carry on the activity'. HMRC's guidance on determining whether an applicant is a 'fit and proper person', contained in section 6.9, Excise Notice 2002, sets out nine main criteria.

HMRC refused the application on the basis that the nine criteria included within HMRC's guidance on the Alcohol Wholesaler Registration Scheme were not satisfied. The Appellant appealed the refusal to the FTT (under section 16(4), Finance Act 1994, the appeal could only be allowed if the FTT was satisfied that HMRC could not reasonably have arrived at its decision and if so satisfied, it has the power to direct HMRC to conduct a review of its decision).

FTT decision

The FTT held that HMRC had wrongly proceeded on the basis that all nine of the criteria in its guidance needed to be met, such that the application fell to be refused if any one of them was not satisfied, and it was a binary question whether a criterion was satisfied or not. Instead, HMRC was required to consider all relevant facts and circumstances together in the round. Using its powers under section 16(4), the FTT directed HMRC to conduct a review of its decision.

Why it matters

Beyond the obvious relevance for wholesalers of alcohol in a similar situation to the Appellant, this is an important decision in setting out the powers of the FTT to assess whether HMRC reasonably arrived at its decision under section 16(4), Finance Act 1994.

The decision can be viewed here.