Customs and excise quarterly update - November 2022

Welcome to the November 2022 edition of RPC's Customs and Excise Quarterly Update. In order to enhance your reading experience, we have adapted the format. We hope you like it

News

• HMRC has published guidance on the updated definitions of chewing tobacco and snuff.
• HM Treasury has published a summary of responses it has received to the consultation on the proposed new alcohol duty system. The stated aim of the system is to make it simpler, more economically rational and less administratively burdensome on businesses and HMRC.
• The European Council has announced that it has adopted new rules providing for a single window for customs, setting out the conditions for digital collaboration between customs authorities and partner competent authorities. The aim is to make international trade easier, shorten customs clearance times and reduce the risk of fraud.

Case reports

Proctor & Gamble International Operations SA v HMRC [2022] UKFTT 229 (TC)

Tribunal allows appeal in product classification case

Proctor & Gamble International Operations SA (P&G) appealed to the First-tier-Tribunal (FTT) against a decision under Article 12 of the Community Customs Code, that Metamucil Suikervrij Orange (MSO) was a "food preparation" under heading 2106 of the EU Common Customs Tariff.

P&G argued that MSO was properly classified as a "medicament" under heading 3004. The key issue in dispute was whether one of the key ingredients in MSO, ispaghula husk, was a "plant extract" or, alternatively, a "chemically defined substance".

Ipsaghula husk is the outer coat of the plantago seed, which is grown in India. The ipsaghula husk is separated from the plantago seed by a winnowing machine and then processed by milling. It is then sent to a manufacturing plant in the USA, where the milled ispaghula husk is blended with excipient, essentially bulking agents and substances to make a product palatable, to produce MSO. Ispaghula husk contains, but does not exclusively comprise, arabinoxylan, which is within the chemical group known as polysaccharides. It is the arabinoxylan that has the relevant therapeutic and prophylactic effects in relation to constipation. There are no other substances in MSO with either therapeutic or prophylactic properties.

It was common ground before the FTT that MSO was a herbal medicinal preparation that had therapeutic and prophylactic properties specific to the treatment of medical disorders, in particular, constipation. It was also common ground that if MSO was not a “medicament” within heading 3004, then it was a “food preparation”, within heading 2106.

In considering the proper classification of MSO, the FTT had regard to, amongst other things, the International Convention on the Harmonised Commodity Description and Coding System (HS), the General Rules of Interpretation for headings 2106 and 3004 contained in the EU Combined Nomenclature at Annex 1 of the Tariff Regulation, the Additional Note to chapter 3004 issued by the EU, and the Combined Nomenclature Explanatory Notes (CNEN) for the Additional Note to chapter 3004. Importantly, the FTT observed that, as the EU could not legislate to change the meaning of any of the terms comprising the headings in the HS, the EU instruments could not properly be read as cutting down or extending the meaning of “medicament” in heading 3004.

In light of those instruments, the FTT determined that a product, such as MSO, which is a herbal medicinal preparation, is conclusively a "medicament" within heading 3004 if the relevant labelling and/or accompanying user directions specify both the disease or ailment the product is directed to and the concentration of an “active substance” which is either a “chemically defined substance” or a “plant extract” and the substance or plant extract have medicinal properties for the prevention or treatment of specific diseases, ailments or their symptoms.

The FTT determined that it was appropriate to describe ispaghula husk as an "extract" from the plantago seed, such that ispaghula husk was a “plant extract” for the purposes of the CNEN, and therefore an "active substance" within MSO. MSO was therefore a “herbal medicinal preparation” being “produced” by a “process” of the combination of the winnowing of the ispaghula husk, the subsequent milling of that ispaghula husk and, thereafter, the blending of the ispaghula husk with the excipients. Alternatively, it was a "plant extract" within the CNEN because it was “produced” by the separation of the ispaghula husk from the plantago seed by winnowing machines, which is a process of “extraction”.

Although the FTT's determination was sufficient to dispose of the appeal in P&G's favour, the FTT also considered P&G's argument that ispaghula husk was a “chemically defined substance”, for the purposes of the CNEN. The FTT rejected that argument on the basis that, amongst other things, ispaghula husk was not a synonym for arabinoxylan, which has therapeutic and prophylactic properties.

Why it matters: This case provides some helpful guidance on the FTT's approach to the classification of "medicaments" under heading 3004. Importantly, the decision confirms that the HS takes precedence over EU secondary legislation with the effect that such legislative instruments must be interpreted in a way that does not cut down or extend the HS headings.

The decision can be viewed here.

Cork Bonded Warehouse Ltd v HMRC [2022] UKFTT 215 (TC)

Tribunal refuses application for admission of late appeal in excise duty case

HMRC issued two excise duty assessments to Cork Bonded Warehouse Ltd (CBW). The first assessment was in the sum of £156,282.67 (Assessment 1) and the second was in the sum of £489,765.86 (Assessment 2). CBW appealed against Assessment 1 within 30 days of the date of the document notifying it of the decision, as required by section 16, Finance Act 1994, but delayed by over eight months before appealing Assessment 2.

CBW sought permission from the FTT to appeal Assessment 2 out of time.

The FTT referred to the Upper Tribunal (UT) decision in Martland v HMRC [2018] UKUT 178 (TCC), which followed the approach adopted by the Court of Appeal in Denton v TH White Ltd [2014] EWCA Civ 906. In that case, the Court of Appeal said that it was necessary to adopt the following three stage approach:

1. establish the length of the delay;
2. establish the reason(s) for why the default occurred; and
3. evaluate and consider all the circumstances of the case.

The FTT noted the need for a balancing exercise taking into account the importance of litigation being conducted efficiently and at proportionate cost. While the strength of a party's case could be taken into consideration, that was only one factor to be considered.

CBW filed its notice of appeal over 8 months late. It acknowledged that this was a significant delay. However, it argued that it did not receive a copy of HMRC's letter sent in June 2020 and that the copy sent by email to Mr Lynch, the Appellant's agent, was missed due to administrative oversights. CBW said that the Covid pandemic caused it administrative issues. It also argued that the financial impact on its business if it was not allowed to appeal Assessment 2 out of time would be significant, given the large sum involved.

The FTT concluded that CBW did not have a good reason for the delay and the delay was significant. While CBW had referred to other possible negative effects caused by Assessment 2, the FTT stated that CBW had not provided any evidence to support those claims. The FTT therefore denied CBW permission to bring its appeal against Assessment 2 out of time.

Why it matters: This decision is a timely reminder to taxpayers of the approach the FTT is likely to adopt when assessing whether to grant permission to appeal an assessment out of time. The approach set out in Denton was carefully followed in this instance. The significant delay in filing the appeal was a substantial factor in the FTT deciding not to grant CBW permission to appeal out of time.

The decision can be viewed here.

Belkin Ltd v HMRC [2022] UKUT 244 (TCC)

Tribunal allows appeal in part in product classification case

Belkin Ltd (Belkin) is a member of a corporate group which manufactures and distributes connectivity products and accessories.

In 2018, HMRC made classification decisions regarding two products: (i) a wireless charging pad with AC adaptor; and (ii) a cable adaptor for iPhones and iPads, which enabled users of those devices to be able to listen to audio and charge their device at the same time. HMRC disagreed with Belkin's classification, rendering the products chargeable to customs duty.

Belkin was unsuccessful in its appeal to the FTT and appealed to the UT.

The UT remade the FTT's decision regarding the charging pad with AC adaptor and dismissed the appeal against the FTT's classification of the cable adaptor for iPhones and iPads.

(i) Charging pad with AC adaptor

The UT decided that the FTT erred in law in its determination of the essential character of the wireless charging pad with AC adaptor, as it had relied on the description of the product in the agreed statement of facts. The parties had not sought to agree what the "essential character" of the product was. The UT was of the view that the essential characteristic of the product was the "wireless charging of mobile phones". When applying the 'removal test' under GIR 3(b) (the test of whether the product would lose its characteristic properties if a particular component were removed from it but would retain them if other components were removed) to the charging pad and the AC adaptor, the UT classified the product under 8504 40 30: "Static converter, of a kind used with telecommunications apparatus, automatic data processing machines and units thereof". Such products are currently free of duty under that classification.

(ii) Cable adaptor for iPhones and iPads

The UT found no error of law in the FTT's decision in relation to this product. The UT rejected Belkin's argument that the combination of a charging function and audio signals to and from an iPhone or iPad meant that the cable adaptors together with the audio function of an iPhone or iPad, are telecommunications equipment.

Belkin had referred the UT to marketing material that was not before the FTT, which confirmed that the audio function was two-way. The UT refused to admit that evidence since it could have been admitted before the FTT and it was not clear that the evidence would change the outcome in any event.

Why it matters: This decision provides helpful discussion of the 'essential character' test and a reminder to those litigating against HMRC before the FTT of the importance of what the parties agree in any statement of agreed facts, especially in cases where the 'essential character' test is being considered.

The case also highlights how difficult it is to adduce new evidence before the UT.

The decision can be viewed here.