Customs and excise quarterly - May 2021

In this update we report on (1) customs general guarantee accounts; (2) the launch of the Small and Medium Enterprise Brexit Support Fund; and (3) the recently published revised timeline for the phased introduction of controls on imports from the EU into Great Britain.

We also comment on three recent cases relating to (1) customs classification; (2) the scope of the First-tier Tribunal's fact-finding jurisdiction; and (3) the principles to be followed when considering an application for reinstatement of a struck-out appeal. 

News

Customs general guarantee accounts  

HMRC has published updated guidance on how to apply for a general guarantee account and pay disputed amounts. The guidance now includes information on how to apply for and use a general guarantee account to cover any import duty and import VAT due on goods when they enter the UK. Read more

SME Brexit Support Fund 

HMRC has published guidance on the launch of a new Small and Medium Enterprise (SME) Brexit Support Fund (the Fund) to support SMEs in adjusting to the new customs and VAT rules which apply when trading with the EU. Read more

Extension to deferral of customs declarations and border controls for imports from the EU

The Chancellor of the Duchy Lancaster and Minister for the Cabinet Office made a written statement  to the House of Commons announcing revisions to the timetable for the phased introduction of controls on imports from the EU into Great Britain. Read more

Case reports

Build-A-Bear Workshop – Tribunal erred in law when applying customs classification rules 

In Build-A-Bear Workshop UK Holdings Ltd v HMRC [2021], the Upper Tribunal (UT) found that the First-tier Tribunal (FTT) had erred in law when applying customs classification rules. Read more

Prospect Origin Ltd – Tribunal did not exceed the scope of its fact-finding jurisdiction 

News

Customs general guarantee accounts 

HMRC has published updated guidance on how to apply for a general guarantee account and pay disputed amounts. The guidance now includes information on how to apply for and use a general guarantee account to cover any import duty and import VAT due on goods when they enter the UK.

A general guarantee account can be used to cover any import duty which may be due on goods when they enter the UK. If the quantum of the import duty is disputed, unknown, or if the goods are declared to Temporary Admission, it may be necessary to provide a guarantee to cover the amounts due on the goods imported.

A general guarantee account allows you to:

• provide multiple guarantees from the same account; and
• continue to import goods into the UK and pay the amount due later, once the amount is agreed.

Examples of what the account can be used to cover include:

• import VAT;
• customs duty;
• excise duties; and
• anti-dumping or countervailing duties.

To apply you can be either a VAT registered importer or agent, a non-VAT registered importer or agent, or a private importer.

The guidance can be viewed here.

SME Brexit Support Fund 

HMRC has published guidance on the launch of a new Small and Medium Enterprise (SME) Brexit Support Fund (the Fund) to support SMEs in adjusting to the new customs and VAT rules which apply when trading with the EU. 

A grant of up to £2,000 can be provided from the Fund to assist SMEs with training or professional advice, provided the business:

• has no more than 500 employees;
• has no more than £100 million in annual turnover;
• has been established in the UK for at least 12 months, or currently holds Authorised Economic Operator status; has not previously failed to meet any tax or customs obligations; and
• imports or exports goods between Great Britain and the EU or Northern Ireland.

If eligible, the grant can be used for training on the following:

• how to complete customs declarations;
• how to manage customs processes and use customs software and systems; and
• specific import and export related issues including VAT, excise and rules of origin.

Applications will close on 30 June 2021 (or earlier, if all funding is allocated before this date).

The guidance can be viewed here. 

Extension to deferral of customs declarations and border controls for imports from the EU

The Chancellor of the Duchy Lancaster and Minister for the Cabinet Office made a written statement  to the House of Commons announcing revisions to the timetable for the phased introduction of controls on imports from the EU into Great Britain.

Under the revised timetable:

• Pre-notification requirements for products of animal origin, certain animal by-products, and high-risk food not of animal origin will not be required until 1 October 2021. Physical sanitary and phytosanitary checks for these products will not be required until 1 January 2022.
• Customs import declarations will still be required but the option to use the deferred declaration scheme has been extended to 1 January 2022.
• Safety and Security Declarations for imports will not be required until 1 January 2022.
• Physical sanitary and phytosanitary checks on high risk plants will take place at Border Control Posts, rather than at the place of destination as is currently the case, from 1 January 2022.
• Pre-notification requirements and documentary checks, including phytosanitary certificates, will be required for low risk plants and plant products, and they will be introduced from 1 January 2022.
• From March 2022, checks at Border Control Posts will take place on live animals and low risk plants and plant products.

The Government has committed to engage extensively to support businesses as they adjust to both the new requirements already in place and prepare for the new requirements referred to above, in the hope that, by doing so, businesses can continue to trade successfully under the new arrangements.

The statement can be viewed here.  

Case reports

Build-A-Bear Workshop – Tribunal erred in law when applying customs classification rules

In Build-A-Bear Workshop UK Holdings Ltd v HMRC [2021], the Upper Tribunal (UT) found that the First-tier Tribunal (FTT) had erred in law when applying customs classification rules.

Background 

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.

Imported goods of this kind are classified according to the Combined Nomenclature (CN) adopted under Article 1 of EC Regulation 2658/1987. The key categories of accessories at issue were: clothing, footwear, plastic and textile items, hearts and accessories for animal toys.

The relevant part of the CN at issue was Chapter 95: "Toys, Games and Sports Requisites; Parts and Accessories thereof". Within this chapter there are various headings and subheadings, including one classifying goods as "Dolls… and parts and accessories thereof" (the Dolls heading), another classifying goods as "Toys representing animals" (the Toys heading), and a further classifying goods as "Other toys, put up in sets" (the Other Toys heading). Within these headings, goods are classified according to their material or function. Guidance note 3 to Chapter 95 (Note 3) provides that "… accessories which are suitable for use solely or principally with articles of this chapter are to be classified with those articles". Depending on their classification, goods will attract different rates of customs duty.

It was HMRC's view that the accessories in question should be classified as follows:

HMRC's classification of the goods would mean they attract customs duty at 4.7%. On the import declarations, Build-a-Bear had classified the majority of these items under the Toys heading, but not under the stuffed sub-heading, the other items had been classified as Other toys, but not under the plastics subheading. This classification would attract customs duty at 0%.

Build-a-Bear appealed against HMRC's C18 decisions.

FTT decision

The appeal was dismissed.

The FTT considered Chapter 95 of the CN 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 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.

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

UT decision

The appeal was dismissed 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".

Comment

This decision provides a useful discussion of the customs duty classification rules.  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.

Prospect Origin Ltd – Tribunal did not exceed the scope of its fact-finding jurisdiction

In Prospect Origin Ltd v HMRC [2021] UKUT 0051 (TCC), the UT dismissed the taxpayer's appeal finding that the FTT had not exceeded the scope of its fact-finding jurisdiction in deciding that although HMRC's decision to revoke the taxpayer's company registration as a registered dealer in controlled oils had been unreasonable, because some irrelevant factors had been taken into account and some relevant factors had been left out of account, on the basis of all the evidence available the decision to revoke would have been the same.

Background

Prospect Origin Ltd (POL) carried on the business of selling fuel, including red diesel, and was approved as a registered dealer in controlled oil (RDCO) in accordance with The Hydrocarbon Oils (Registered Dealer in Controlled Oils) Regulations 2002 (the 2002 Regulations). That approval enabled it to sell marked rebated gas oil (which is also referred to as MGO, gas oil or red diesel).

In July 2018, HMRC sent a letter to POL revoking its status, citing 16 instances of red diesel being supplied for use in road vehicles and revoked that approval (HMRC's decision). POL appealed HMRC's decision to the FTT. The FTT held that 12 of the 16 instances had been proved. The FTT also heard evidence from an HMRC officer that approximately 200 customers had been observed directly filling their road vehicles with red diesel and on 61 occasions POL's employees had been observed filling vehicles on behalf of customers. The FTT considered, on the balance of probabilities, that in the vast majority of cases they would have been directly filled with red diesel.

The FTT concluded that HMRC's decision  was unreasonable as there were relevant matters which should have been taken into account which were not, for example, the fact that POL's manager had been dismissed and irrelevant matters that were taken into account which should not have been, for example, the additional instances of red diesel fuelling not relied on in HMRC's decision. Notwithstanding this, on the basis of the facts before the FTT, the FTT concluded that if the additional material had been taken into account (and the irrelevant factors not taken into account) HMRC's decision would inevitably have been the same and therefore dismissed POL's appeal.

POL appealed to the UT. As part of its appeal, POL also applied to rely on fresh evidence in the UT that was not before the FTT.

UT decision

The appeal was dismissed.

POL's three main grounds of appeal were as follows:

1. Ground 1: The FTT was not entitled to conclude, from the HMRC Officer's evidence, that 200 customers had directly filled their road vehicles with red diesel, or that a further 61 customers had their road vehicles filled with red diesel by POL's employees.
2. Ground 2:
   1. The FTT exceeded the scope of its jurisdiction when it made findings on the existence of other instances of road vehicles being directly filled with red diesel beyond those referred to in HMRC's decision. Accordingly, the FTT was not entitled to rely on these instances in support of its conclusion that, even if HMRC had taken all relevant considerations into account, and ignored irrelevant considerations, HMRC's decision would inevitably have been the same.
   2. In any event, the additional material did not clearly demonstrate that HMRC would inevitably have made the same decision. Had HMRC approached that material properly, they might well have accepted the fundamental weakness of that material and discounted it from HMRC's decision-making process.
3. Ground 3: New evidence, not before the FTT, demonstrated that there was a vacant petrol station close by which could have been used as a 'pop-up' garage unlawfully selling red diesel for use in road vehicles. That evidence called into question the FTT’s conclusions that a number of drivers were identifying POL's premises as the source of the red diesel found in their road vehicles.

In relation to Ground 1, the UT found against POL. The UT concluded that there was no reason to suppose that the FTT had misunderstood the scope or significance of any matters that the HMRC Officer had accepted in cross-examination. The FTT was entitled to conclude that, faced with many more direct fills of red diesel in road vehicles than the HMRC had been aware of at the time of HMRC's decision, it was "inevitable" that HMRC would make the same decision if they took into account all relevant considerations.

The UT also rejected Ground 2. The UT commented that the statutory scheme recognised the desirability of HMRC having a wide discretion on administrative decisions, but also recognised the FTT's important fact-finding function. HMRC's Decision was expressly based on factual assertions that POL was frequently allowing its customers to fuel road vehicles directly with red diesel. The carefully calibrated division between the roles of the FTT and HMRC were respected, not disturbed, by the FTT having the power to make further findings, following a hearing at which POL could present its case, as to the number of occasions on which road vehicles were filled directly with red diesel at POL's premises.

In relation to Ground 3, the UT also found against POL, commenting that it was " … fair and just, and in accordance with the overriding objective … " that  POL " … should bear the consequences of failing to marshal all the evidence that, with hindsight, it wished it had".

The decision can be viewed here. 

Comment

This decision provides a useful guide for taxpayers on the scope of the FTT's fact-finding jurisdiction and the approach that is likely to be taken by the courts in similar red diesel cases. Of particular note, is the importance of marshalling all available evidence in the case and ensuring that it is put before the FTT from the outset in order to ensure that all evidence is taken into account by the courts. Any application(s) for late evidence to be admitted on appeal, after the FTT has made its decision, are unlikely to be successful.

In HMRC v BMW Shipping Agents Ltd [2021] UKUT 91, the UT set out the principles to be followed when considering an application for reinstatement of a struck-out appeal.

Background

On 18 April 2016, HMRC sent BMW Shipping Agents Ltd (BMW) a C18 post-clearance demand note for unpaid import VAT in the sum of £3,029,626.15. In response, BMW instructed a tax agent, Mr Gibbon, to appeal against HMRC's demand.

Unfortunately, as a result of a clerical error, Mr Gibbon used the wrong email address when, on 7 December 2016, he submitted the notice of appeal with the FTT. As a consequence of this error, neither Mr Gibbon nor BMW were privy to the subsequent correspondence by the FTT, which included a requirement for BMW to serve a statement of case, an 'unless' order threatening to strike out the appeal if the statement of case was not filed, and a letter from the FTT to Mr Gibbon alerting him that, in line with the 'unless' order, the appeal had been struck out as of 22 November 2017.

Approximately ten months later, on 14 September 2018, Mr Gibbon enquired for the first time as to the progress of the appeal. It was only when the FTT responded to this enquiry on 12 October 2018, enclosing hard copies of the correspondence sent to the incorrect email address, did Mr Gibbon become aware that the appeal had be struck out.

Mr Gibbon immediately applied for (a) permission to make a late application for reinstatement of the appeal; and (b) to have the appeal reinstated. The FTT allowed the application, prompting HMRC to appeal to the UT.

UT decision

HMRC argued that by failing to apply the principles set out by the UT in Martland [2018] UKUT 178, that particular weight should be given to the need for litigation to be conducted efficiently and at proportionate cost, the FTT had incorrectly applied the law. The FTT had said that the Martland principles did not have special weight or importance.

The UT agreed with HMRC and proceeded to remake the decision.

In respect of the application for extension of time to apply for reinstatement, the UT determined that the focus should be on the manner in which the 28 day limit for applying for reinstatement was missed. The UT noted faults on the part of both HMRC and Mr Gibbon. However, ultimately, no application could be made unless and until Mr Gibbon had become aware of the need to make an application. For this reason, the UT allowed the extension application.

With regard to the reinstatement application, the UT considered the failures of Mr Gibbon and, by extension, BMW, to comply with the requirements to produce a statement of case and respond to the 'unless' order, were both serious and significant. However, the UT considered the initial clerical error of the incorrect email address to be a minor one.

After weighing up all of the relevant factors, the UT found in favour of BMW. In its view, the consequences of not allowing the reinstatement application and the potential loss of £3,029,626.15, outweighed the negative consequences for HMRC of having to re-litigate an appeal which they   thought had been concluded in its favour.

Comment

This decision illustrates the difficulties and challenges faced by the tax tribunals in weighing up the conflicting interests of the parties when endeavouring to deal with a case 'fairly and justly'. It also demonstrates the serious and costly consequences that can flow from an administrative error.   

The decision can be viewed here.