Customs and excise quarterly update - November 2023

Welcome to the November 2023 edition of RPC's Customs and Excise Quarterly Update.

News

• HMRC has extended the Trader Support Service (TSS) until 31 December 2024. The TSS, originally set up in 2020, is a free-to-use platform which provides support to traders moving goods between Great Britain and Northern Ireland. The platform provides resources to assist businesses to understand the Windsor Framework, introduced earlier this year with the aim of making trade between Northern Ireland and the UK easier. Further trade improvements under the Windsor Framework are soon to be introduced and so the TSS will remain in place to continue to assist traders to navigate the Framework. 
• Switzerland is set to abolish import duties on almost all industrial goods from 1 January 2024. Two key changes are due to come into force: (1) the abolition of industrial tariffs; and (2) the simplification of the Swiss tariff structure. Items such as cars, clothing, and footwear along with industrial products, such as chemicals and plastics, will no longer be subject to customs duties when Switzerland imports these items. This will reduce the need for customs compliance. The Swiss tariff structure is also set to be reduced from 9,114 different tariff numbers to 7,511. These changes aim to lower the high costs of goods and services in Switzerland, as well as minimising trade barriers.
• The UK has secured a two-year extension under the UK-South Korea free trade agreement, enabling British companies to remain eligible for reduced or zero tariffs when selling goods to South Korea. The UK and South Korea are due to enter into negotiations for an enhanced, modernised trade deal which will cover new sectors, including the digital sector. The South Korean market is fast-growing, with its import market expected to grow 45% by 2035. This extension to the free trade agreement, as well as the upcoming negotiations, will come as welcome news to British companies. 

Case Reports

WF & L Ltd v HMRC [2023] UKFTT 754 (TC)

WF & L Ltd (the Appellant) was a trader in commercial light vehicles. The Appellant's supply chain was structured as follows: (1) vehicles were manufactured by Ford Otosan (Ford) in Turkey, (2) the vehicles were moved under duty suspension from Turkey to Spain, (3) the vehicles were transported to Gibraltar, and then (4) the Appellant purchased the vehicles from Lucas Imossi Motors Ltd (LIM) in Gibraltar. Each transit was accompanied by a T1 document, which suspended import duties and other charges until the goods reached their final destination.

On 18 October 2018, HMRC issued a post clearance demand to the Appellant, in the sum of £768,742.57 duty and £153,748.51 VAT. This post clearance demand related to 85 import entries for vehicles which the Appellant had imported to the UK. The vehicles had been imported on the basis that they were liable to 0% duty using the customs procedure code for returned goods relief (RGR). HMRC asserted that the goods were in fact not eligible for RGR and the import declarations were therefore incorrect. The Appellant appealed to the First-tier Tribunal (FTT). 

The Appellant accepted that the goods were not eligible for RGR but argued that, in any event, the imports would carry a 0% duty rate under the customs procedure code for preference from Turkey. The Appellant further argued that it should have been entitled to amend the import declarations and accepted that, if it was not, it would be liable to duty of 10% and the associated VAT.

The FTT was required to determine the following two issues:

• Was the Appellant able to amend its import declarations to benefit from preference?
• Did the vehicles comply with the requirements for preference under 2006/646/EC: Decision No 1/2006 of the EC-Turkey Customs Cooperation Committee of 26 September 2006 (Turkey decision), to the effect that they were capable of being imported at 0% duty?

In relation to the first issue, the FTT held that it would be possible, in principle, for the Appellant to amend its import declarations on the basis that Article 78(3) of the Community Customs Code provides for the mandatory regularisation of incorrect declarations where it is established that the declarations have been made by reference to the wrong procedure code. 

In relation to the second issue, for the Turkish decision to apply in respect of goods or parts being exported to the EU, those goods or parts must have been cleared into free circulation in Turkey before they are exported. The FTT concluded that, in this case, there was insufficient evidence to conclude that the parts used to manufacture the vehicles were in free circulation in Turkey prior to being exported. LIM was supposed to notify Ford that the goods were to be exported to the EU before they were manufactured so that Ford could clear the parts into free circulation, but they had failed to do this. 

The FTT was also of the view that, even if the goods were eligible for preference, the Appellant would still have failed to meet the requirements of the Turkey decision, which requires preference to be evidenced by a Movement Certificate A.TR. The Appellant had failed to obtain a Movement Certificate A.TR retrospectively and argued that it was not required if it could evidence its eligibility by other means. The FTT did not accept this and dismissed the appeal.

Why it matters: This decision is a timely reminder that importers should consider the procedural and evidential requirements for preference at each stage of the supply chain and ensure that third parties are continuing to meet them. 

The decision can be viewed here.

KRF UK Ltd v HMRC [2023] UKFTT 00717 (TC)

KRF UK Ltd (the Appellant) appealed to the FTT against HMRC's C18 post-clearance demands and associated penalties following decisions that certain goods had been incorrectly classified and declared under heading 8431 (with a nil duty rate) instead of 8483 (with a 3.4% duty rate). 

The relevant goods in question fell into two categories: (1) plain bearings (otherwise known as bushes); and (2) liners. Both types of goods were designed and manufactured for use specifically in the machinery of JCB, the Appellant's client.

The relevant Section XVI of the Tariff is headed: "Machinery and mechanical appliances; electrical equipment; parts thereof, sound records and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles". The relevant Chapter 84 in that section is headed: "Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof". The relevant sub-heading under heading 8483, which HMRC were defending, was for "Bearing housings, not incorporating ball or roller bearings; plain shaft bearings/Other".

Expert evidence was adduced to the effect that plain bearings are often specifically designed for a particular application and that the pivot pins around which the plain bearings/bushes in question revolve, could not be described as 'shafts' or 'axles', from an engineering perspective, because there was not continuous rotation. The design of the bearings/bushes would have been different if they were designed as plain shaft bearings. 

The FTT concluded that:

• the liners were designed to be fixed in place with no movement at all so cannot be regarded as 'plain shaft bearings';
• accepting the expert's uncontested evidence, the bearings/bushes are plain bearings and not plain shaft bearings; and
• the objective characteristics and properties of an item make it clear that they are intended for a particular use but which could also be used for other purposes. However, that cannot affect their appropriate Tariff classification based on their objective characteristics and properties.

The FTT therefore allowed the appeal in relation to both the post-clearance demands and the associated penalties.

Why it matters: This decision provides a useful overview of how the tax tribunals and courts approach customs classification. 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 in relation to the classification of their products as an incorrect classification can have significant adverse financial consequences.

The decision can be viewed here.

Piramal Healthcare UK Ltd v HMRC [2023] UKFTT 00891 (TC)

Piramal Healthcare UK Ltd (the Appellant) is a pharmaceutical company based in the UK who imported active pharmaceutical ingredients (API) from suppliers outside of the UK. The Appellant provided services in relation to the API, but did not make any onward supply of the API, and the suppliers remained the owners of the API. As the importer of the goods, the Appellant paid import VAT.  

In January 2018, the Appellant sought confirmation from HMRC that it was correct to claim credit for the import VAT as input tax in its VAT return during the period in which the import took place. HMRC confirmed this approach was correct. 

However, following a later VAT inspection, HMRC concluded that the Appellant was not entitled to claim credit for the import VAT and issued the Appellant with a formal decision to this effect on 4 October 2018. The decision explained that the goods did not form part of any onward supply and so were not used for the purposes of the business. It was on this basis that, in August 2019, HMRC made assessments to recover VAT in respect of the imports. 

On 11 April 2019, HMRC issued Revenue and Customs Brief 02/19 (the Brief), which set out what it considered to be the correct approach in relation to import VAT, namely, the customer outside the UK should pay the import VAT and subsequently reclaim it. HMRC noted in the Brief that its previous guidance in relation to the correct procedure was not clear and so it would not pursue VAT claimed before 15 July 2019, giving companies a three-month and three-day transitional period.

In May 2019, a further decision was issued to the Appellant, withholding the payment of import VAT claimed by the Appellant which it had paid. 

The Appellant appealed to the FTT and relied on the following two grounds of appeal:

• import VAT should be available as input tax credit in the circumstances; and 
• HMRC's decisions were not in line with the EU principle of equal treatment as other taxpayers had been allowed to claim credit for import VAT until 14 July 2019, in keeping with the transitional period following the publishing of the Brief.

The FTT rejected the first ground of appeal on the basis that the relevant goods or services must "form a cost component in relation to an onward supply" for VAT to be available as an input tax credit. In this case, the Appellant at no point owned the goods, the supplier remained the owner of the goods throughout. Therefore, the goods could not form a cost component. This was coupled with the fact that the Appellant did not make an onward supply of the goods.

The FTT then went on to explore the EU principle of equal treatment raised under the Appellant's second ground of appeal. Under the EU principle, equal treatment is required in similar situations unless objectively justified. The relevant question that the FTT explored was whether the Appellant had been treated differently from other taxpayers in similar situations, and if it had, to determine if this treatment was objectively justified.

The FTT noted that the Brief provided clear guidance to taxpayers on HMRC's position. However, the Appellant had knowledge of HMRC's position in advance of the Brief, because HMRC wrote to the Appellant on 2 August 2018 and noted that the import VAT was not available as an input tax credit. On this basis, the FTT concluded that a transitional period of three months and three days from 2 August 2018 should apply to the Appellant. The import VAT incurred on or before this transitional period, ending on 5 November 2018, would be allowed as input tax credit under the principle of equal treatment. The FTT held that, from 6 November 2018 onwards, the import VAT incurred would no longer be allowed as a credit.

Why it matters: This decision provides helpful guidance as to the relevant circumstances to determine if import VAT is available as an input tax credit. The case also highlights how the FTT will apply the principle of equal treatment.

The decision can be viewed here.