Paddington’s Tax Troubles: Build-A-Bear and VAT

By: Victoria Guevara

February 20, 2023

Although Paddington the bear is not part of the Build-A-Bear franchise, he is a famous stuffed bear known by most in the United Kingdom. Stuffed bears similar to Paddington are having tax issues in the United Kingdom. Specifically, Build-A-Bear is being charged customs duties and value-added tax (VAT) for the parts and accessories used for its stuffed animals when they are imported into Britain.

         This is a classic case of differing statutory interpretations. In October 2012 and July 2013, the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”)  upheld a tax imposed on Build-A-Bear for a customs duty and import VAT on the basis that Build-A-Bear did not correctly declare the import of certain goods under the Combined Nomenclature-a tool used by the EU for classifying goods. In July 2015, the HMRC also upheld a decision to refuse to repay Build-A-Bear customs duties and import VAT, and Build-A-Bear appealed both decisions to the First-tier Tribunal-a court of appeals for executive agency decisions. The classifications by the HMRC have a customs duty of 4.7% while Build-A-Bear’s classification has a customs duty of 0%.

         In order to accommodate the particular, or “non-human” features of the Build-A-Bear stuffed bears (“Bears”), the clothes sold by Bild-A-Bear feature slits that allow the tail of the bear to be pulled through and for the clothes to fit properly. Similarly, the wigs sold by Build-A-Bear have two small loop-holes that allows ears of a bear to be pulled through for the wig to fit properly. Build-A-Bear also sells footwear for the stuffed bears, like soccer shoes, sneakers, slippers, and sandals. These shoes are all rounded and have the company logo on the thread of the sole.

         For readers born before the 2000s, do you remember picking out “heart” for the bear, making a wish, spinning around, and doing whatever the worker told us so that we gave the bear the best heart? Well, these hearts are part of the “accessories” that are being taxed. They are textile or plastic, depending on which one you pick. Aside from the hearts, clothes, wigs, and shoes, other scaled-down versions of human accessories, like sunglasses and phones, are also the subject of the accessory tax.

         Let’s look at the law. The customs classification for goods imported from outside of the EU is based on the Combined Nomenclature­. The British adopted version is Article 1 of the EC Regulation 2658/1987. There is an Annex to this Regulation, which the First-tier Tribunallooked to for interpretation. Specifically, they looked to Rules 1, 3, and 6, which in summary, explain different methods of classification.

         With regard to case law, the court referred to various cases both in the UK and also in the Court of Justice of the European Union. It found, among other things, that “the decisive criteria for the tariff classification of goods must be sought in their objective characteristics and properties as defined in the wording of the relevant heading of the Combined Nomenclature” from Holz Geenen GmbH v. Oberfinanzdirektion Munchen (Case C-309/98) at [14]. Also, the intended use of goods “may be considered part of the classification analysis where that use is inherent to the goods,” according to Hauptzollamt Hamburg-St. Annen v Theyssen Haniel Logistic GmbH (Case C-459/93) at [13].

         There was no dispute that the accessories all fell within Chapter 95 of Section XX of the Combined Nomenclature, titled “Toys, Games and Sports Requisites; Parts and Accessories thereof.” The relevant part of the statute said:

Under Chapter 95, Build-A-Bear argued that the parts and accessories can be taxed under both categories concerning parts and accessories for dolls and parts and accessories for toys, which would make them duty-free.

The First-tier Tribunal found that the clothes and wigs were accessories and falling within the Toys classification because they are accessories that “which are principally suitable for use with those articles,” with “articles” referring to the ones listed only under the Toys classification. The footwear was also found to be classified in the same section because the small size and rounded shape were designed specifically to fit stuffed bears, and thus “indicates that the footwear is suitable for use, principally, in the sense of for the most part of chiefly, with stuffed bears.” The miniature versions of human items, like sunglasses and phones, fell under the Dolls classification, but only that one, and not the Toys classification.

Build-A-Bear appealed to the next court, the Upper Tribunal. Despite its many plastic and textile hearts, it found no love. After reviewing the First-tier Tribunals findings and interpretation of applicable law, it did not accept the case. The Upper Tribunal found that lower court’s decision relating to clothes and wigs had an error of law, but they would not set aside the decision based on that, and found the classifications into one category or the other, but not both, to be correct. The Upper Tribunal had the same reasoning for the footwear, hearts, all other accessories. It remanded the case to the First-tier Tribunal on other grounds. While Paddington got around these requirements as a local, his American-based cousins can’t say the same.