Miaowch! HMRC loses cat litter appeal at the First-tier Tribunal

Petmaster Limited (Petmaster), a Turkish owned business that imports cat litter into the UK and stores them in a Fulfilment House (FH) for subsequent sale in the UK, found itself in a challenging situation when 24 tonnes of its product were confiscated by HMRC. Unknown to Petmaster, the FH was operating without the relevant approval from HMRC.

Adding insult to injury, Petmaster was also wrongly advised by its accountants that VAT registration wasn’t necessary until it reached the £85,000 registration threshold, despite its initial inclination to register. It therefore did not register for VAT, even though it was clear that the business was not established in the UK and was therefore legally obliged to. 

The seizure itself took place during an unannounced HMRC inspection of the FH, which resulted in all stored goods, including Petmaster’s cat litter, being confiscated. The FH did not appeal the seizure notice and failed to notify Petmaster that the goods had been seized. Petmaster’s first communication with HMRC was 32 days after the seizure, which is outside the time limit for challenging the seizure or restoration. 

Petmaster requested the restoration of their seized goods, providing evidence of ownership and details of the financial impact of the loss of the goods on the business. HMRC refused to restore the goods, based on the company’s failure to provide sufficient evidence of ownership of the cat litter and verify the FH’s approval status with HMRC, and due to non-compliance with VAT registration obligations. A subsequent review of HMRC’s decision by an independent reviewer upheld the refusal, citing Petmaster’s failure to verify the FH’s approval status with HMRC and alleged non-payment of VAT on the seized goods, giving it an unfair business advantage over other traders in the UK market.

Petmaster appealed against HMRC’s decision, arguing that it had acted honestly and was misled by its accountants and the FH. The Tribunal found in favour of Petmaster, directing HMRC to alter its restoration decision, based on the following:

• Ownership and payment of import VAT: HMRC had wrongly asserted that import VAT had not been paid on the consignment (which significantly impacted the review decision) and that Petmaster had failed to prove its ownership of the goods. The Tribunal found that Petmaster did own the goods and had declared them and paid the relevant import duties and VAT.
• Reliance on professional advice: The Tribunal recognised that Petmaster had been misled by its UK accountants, regarding its VAT registration process and was not aware of the need to check the registration status of the FH. Given the circumstance and language barrier, the Tribunal found it unreasonable to expect Petmaster to verify the FH’s approval status independently.
• Financial impact: The Tribunal also recognised the severe financial consequence of the non-restoration on Petmaster.

Although Petmaster has won its appeal, it remains to be seen how the position will be rectified by HMRC, given the goods were destroyed. The time and other costs likely to have been incurred by Petmaster, will surely mean the business is likely to lose money as a result of HMRC’s error. The decision also highlights the importance of conducting thorough due diligence on tax and regulatory compliance obligations, as well as third-party tax advisors, by international businesses in the countries where they plan to operate, especially where there are language barriers.