Online retailer looks to have lost £53m battle with the taxman

Online retailer N Brown looks to have lost a £53.8m battle with the taxman.

The firm, who’s brands include JD Williams, High and Mighty and Figleaves, had argued that it did not need to pay VAT on some of its marketing costs.

The dispute has dragged on for months, a tribunal was held in May and a draft decision has now been published.

The Manchester based business described the ruling as mixed and has said that the financial implications are uncertain.

N Brown said the findings are being assessed in detail and the ruling will be issued in final form in the near future.

The company is holding detailed talks with the tribunal and HMRC on the findings.

N Brown argued that as its marketing expenditure mainly relates to the sale of goods (which is VAT standard-rated), rather than financial services which are VAT exempt.

It claimed that it is entitled to recover VAT on the vast majority of these costs.

HMRC argued that as the marketing costs relate to both to the sale of goods and financial services, a substantially higher portion of VAT is non-recoverable.

The total amount came to £43.8m and the group had previously warned that a further £10m was expected to be paid under this assessment in the current financial year.

Based on the advice of external tax advisors, together with legal counsel’s opinion on certain elements of the cost allocation, the group had believed it would recover this amount in full from HMRC and has been engaged in a legal process to do so.

A statement to the Stock Market said: “The draft ruling has mixed implications for N Brown and we are disappointed by the current outcome.

“The case has two key aspects, those being attribution and apportionment. With respect to attribution, the judge agreed with HMRC, finding that when the group is marketing goods it is also in effect marketing financial services, even if there is no reference to this in its marketing materials.

“The judge however ruled against HMRC and directed that in apportioning costs via a turnover ratio, vatable product turnover should be included in full, but VAT exempt financial services income should in part be excluded to the extent that it did not relate to the original marketing activities.

“While the financial implications of this ruling for N Brown remain uncertain pending its ultimate outcome, the group expects that irrecoverable VAT on its marketing costs will increase by between £6m to £9m per annum on a full-year basis, with a proportionately lower impact anticipated for FY19.

“The group will be seeking to mitigate as much of this cost increase as is possible through continued operating efficiencies and as such remains comfortable with market expectations for the current year.

“Furthermore, the group is currently assessing an anticipated material non-cash exceptional charge to the income statement in FY19 relating to a partial impairment of the existing VAT debtor.

“A repayment to the group of some element of previous cash payments is expected in due course.”

N Brown said it is considering an appeal against the decision.

The firm will continue to work with HMRC to agree repayments. Further announcements on the ruling will be made in the coming months.