High street retailer Next has been hit with a £22.4m tax bill after a court ruled the firm’s complex tax scheme was artificial tax avoidance.
HM Revenue & Customs (HMRC) successfully challenged Next Brand Ltd, which is part of the well-known Next group, over its use of a tax avoidance structure known as a rate-booster.
The First-Tier Tribunal (FTT) 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.
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.
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.
About £130m in tax is at stake across 20 rate-booster cases, which were waiting on the P&O and Next decisions. Around 70 rate-boosters have already been conceded by companies rather than go to court, which has brought in more than £500m in tax.
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 and is known as double taxation relief.
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.
No doubt we will see more high profile tax wins by HMRC in the coming months as the government continues its clampdown on corporate tax avoidance.