Build-a-Bear: FTT erred in law

In Build-A-Bear Workshop UK Holdings Limited v HMRC [2021] UKUT 0067, the Upper Tribunal (UT) heard both the appeal and cross-appeal, finding that the First Tier Tribunal (FTT) erred in law when applying Customs Duty classification rules.

Build-A-Bear Workshop UK Holdings Limited (BAB) is the UK company of the global Build-A-Bear group. The group sells customisable bears and dolls online and in-store. There are also other accessories that can be bought, with or without the bear/doll. 

HMRC raised and upheld appeals on three C18 post-clearance demands in respect of incorrectly declared imported goods and refused to repay the customs duties and import VAT. HMRC upheld that the correct duty owed was 4.7%, whereas BAB argued it should be 0% and appealed to the FTT.

Duties levied are based on the classification given by the EU's Combined Nomenclature (CN).

• The CN is based on the World Customs Organisation's Harmonised System.
• To assist with correct classification there is guidance, of which, the Explanatory Notes to the CN (CNENs) are relevant to this case.
• The CN uses an eight-digit system. The first six digits come from the Harmonised System and the next two are from the CN subheading (or 00 where no subheading is relevant).
• The items in question were classified under Chapter 95 of the CN: 'Toys, Games and Sports Requisites; Parts and Accessories thereof'.
• CNEN 3 (Note 3) provides the guidance for this Chapter: 'Subject to note 1 above, parts and accessories which are suitable for use solely or principally with articles of this chapter are to be classified with those articles'.

FTT decision

The accessories subject to the C18s were divided into six categories by the FTT and classification was decided as follows:

• Clothing & wigs, Toys Subheading only, as principally for use with stuffed animal toys. This was based on the interpretation and application of Note 3. 
• Footwear, as above, Toys Subheading only, as principally for use with stuffed bears.
• Plastic & textile items, Dolls Subheading as parts and accessories of dolls.
• Sets, sets of clothing that had one outfit suitable for bears (with slits) and one suitable for dolls (without slits) were classified as Toys Subheading, as accessories of stuffed toys.
• Hearts, equally suitable within both the Dolls and Toys Subheadings but not objects of amusement in their own right. The FTT decided these should be classified as whichever heading was most appropriate due to the function as a textile or plastic item.
• Accessories for animal toys, equally suitable for use with stuffed or hard-bodied animal toys. The FTT classified these in their own right as Other Toys Subheading.

The appeal was upheld in part. The FTT granted both parties the right to appeal.

BAB appeal

• BAB appealed on the grounds that:
  • The FTT had misinterpreted and incorrectly applied Note 3.
  • The FTT had failed to identify Dolls Subheading as more specific over Toys Subheading where the two were deemed equally suitable.
  • In relation to Footwear, the conclusion reached by the FTT was not supported by the findings of fact.
•  HMRC claimed that these grounds were challenges to the evaluation of facts by the FTT, dressed up as points of law.
  • The UT confirmed that the "appellate tribunal is limited to an appeal on a point of law, that it confines itself to what are truly questions of law and does not substitute its own view of the facts for that of the fact-finding body", as per Nugee J in Cooneen Watts & Stone Ltd v Revenue and Customs Commissioners [2014] UKUT 31 (TCC).
  • The UT held that the challenge of whether the FTT misinterpreted and incorrectly applied Note 3 is a point of law. If that basis then led to decisions of classification, the UT was able to review those findings of fact.
• The UT held, in relation to Note 3, that:
  • The FTT correctly applied the plain and obvious meaning of the word 'principally' to Note 3. Items can only have a principal use related to one item and, as such, one heading or subheading. 
  • Note 3 operates alongside the wording of the headings and subheadings in Chapter 95 to determine classification. It should not be read into the wording of the headings and subheadings, so as to change that wording.
  • The FTT erred in law by reading Note 3 as such. Items that were not for use solely or principally with the items in the heading or subheading should not be excluded from such a classification, if appropriate.
• The UT reviewed the item categories as follows:
  • Clothing & wigs/ Footwear: The FTT erred in law with the incorrect interpretation and application of Note 3. Despite this, the UT came to the same conclusions on classification, albeit for different reasons. The UT also found that FTT decision was supported by the findings of fact. The appeals were dismissed.
  • Hearts: The error in law regarding Note 3 meant these items were excluded from the Dolls Subheading as parts and accessories. The UT disagreed and the appeal was upheld.
  • Animal accessories: As the items were equally suitable for classification under two subheadings, an EU General Rule for Interpretation of the CN (GIR) states that the heading that provides the most specific description in relation to the item be used ("toys representing animals or non-human creatures – other"). The appeal was upheld.

HMRC cross-appeal

• HMRC challenged the classification of sets. The UT found that the FTT had erred in law by not applying the correct process for determining classification where more than one heading or subheading applies. The UT held the correct subheading was Sets Subheading and the appeal was upheld.
• HMRC challenged the classification of plastic & textile items. The UT held that the FTT was clear in its decision based on the facts and the appeal was dismissed.
• HMRC claimed that the FTT had erred in not finding that BAB had failed to discharge the burden of proof on the taxpayer in providing evidence for the appeal. The FTT would not be drawn on the value of BAB's liability. It invited the parties to reapply to Tribunal if, once classifications had been decided, there was still no agreement on the value. The UT agreed with HMRC that the C18s must stand where BAB has failed to provide evidence of the nature of goods imported. Whether this occured is a matter for the FTT, which did not make any findings of fact on the matter. The UT remitted the issue and the question of value of the liability back to the FTT.

Useful guides on this topic

Statutory Review (by HMRC) 
What is a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review?

How to appeal an HMRC decision 
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Importing goods into GB from 1 January 2021 
The post Brexit transition period ends on 31 December 2020. HMRC has issued guidance for importing goods. 

The Bear Necessities: a story for Christmas 
A light-hearted story inspired by the FTT hearing.

External links

Build-A-Bear Workshop UK Holdings Limited v HMRC [2021] UKUT 0067

Build-a-Bear UK Holdings Workshop Limited v HMRC [2019] TC7479.