Managing Your Cash Flow

Next loses battle against HMRC, which claimed the retailer was avoiding tax

3 min read

22 May 2015

High street retailer Next has handed a £22.4m bill by HM Revenue & Customs (HMRC) after a court found it had avoided paying tax.

In his final Budget before the 2015 general election, George Osborne implemented what has been dubbed as “Google Tax”, in order to prevent large companies from diverting profits out of the the UK.

“Let the message go out: this country’s tolerance for those who will not pay their fair share of taxes has come to an end,” Osborne said.

A month after his proclamation, the UK was criticised for its failure to prosecute tax evaders using HSBC’s Swiss arm, which led to Margaret Hodge, who chaired the Public Accounts Committee investigation into the HSBC Swiss bank, calling Britain “pathetic”.

To prevent another incident, Next was given a bill of £22.4m bill when it was found that it had diverted UK profits to foreign subsidiaries in order to claim tax relief.

The ruling, which HMRC said could open the door to £130m worth of losses from other firms, might be what was needed to raise awareness of a tax avoidance scheme called a “rate booster”.

The schemes allow firms to avoid corporation tax on foreign profits, that are then paid back to the UK parent firm. Under rules meant to prevent double taxation, firms were able to claim credit for money they made overseas.

According to HMRC, it is best described as “complex circular movements of money between companies in the same group, so they can claim there has been double taxation”.

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Next isn’t the first case of its kind to reach court. More than £500m has been brought in by HMRC after changing the rules about rate boosters in 2009. The legal changes were made to ban rate booster schemes. So far only P&O Ferries, which was taken to court in 2013, and Next have faced a judge. 

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.”

In a statement, Next said it had paid the tax owed to HMRC “some years ago”. The company also claimed it had been fully accounted for at the time, and so has described the court case as “a technical debate around complex legislation”.

It added that current UK law generally allowed companies to “repatriate their profits without a tax charge”. Next added that the claim was for £22.4m — of the £1.3bn of corporation tax that the company paid over the past ten years — and it should be taken in that context.