NEXT is not entitled to reclaim £22.4m in tax after a court ruled the high street clothing store’s tax structure constituted artificial tax avoidance.
HM Revenue & Customs successfully challenged Next Brand Ltd, which is part of the well-known Next group, over its use of a tax arrangement known as a ‘rate-booster’.
The first-tier tribunal ruled in HMRC’s favour after finding Next’s scheme artificially moved money around the group so they could try and claim tax relief on overseas profits.
According to Next, the disputed £22.4m had already been paid and it sought to reclaim it as it would not have been payable under current legislation.
This is the second rate-booster case to reach the FTT after the tribunal ruled against P&O in 2013, who appealed and a decision is awaited.
The retailer added the payment was fully provided for in its accounts at the time of payment, and as such, there is no accounting consequence on Next from the tribunal’s findings, nor are there any cash sums owed to HMRC as a result.
However, the ruling could potentially see HMRC set for a £130m from around 20 other businesses using similar schemes, the authority claims.
Rate-booster schemes involve trying to avoid corporation tax on foreign profits that are paid back to the UK from a subsidiary.
The UK company receiving these profits gets credit for any foreign tax the subsidiary paid. The rules are designed to prevent companies being taxed twice on the same income.
Some companies set up artificial arrangements involving complex circular movements of money between companies in the same group so they can claim there has been double taxation.
Through these movements the companies claim far more tax had been paid on the overseas profits than was actually the case.
Legal changes in 2005 and 2009 mean rate-booster schemes are no longer possible or attractive.
HMRC’s director-general of business tax Jim Harra said: “This case shows how HMRC takes effective action against big businesses that try to avoid paying tax through convoluted, artificial avoidance schemes. HMRC expects all businesses to steer well clear of such schemes.”
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