Next faces £22m bill after court finds retailer diverted cash to avoid tax

Ruling opens door for HM Revenue & Customs (HMRC) to recoup losses from other firms which used rate-booster schemes

High street retailer Next has been hit with a £22.4m tax bill after a court found that it diverted profits made in the UK to offshore havens to avoid paying tax.

The ruling, which HM Revenue & Customs (HMRC) said could open the door to £130m of recouped losses from other firms, followed a successful challenge to a tax avoidance scheme called a rate-booster.

The first-tier tribunal (FTT), which is part of the courts system and is overseen by independent adjudicators, ruled in HMRC’s favour after finding Next’s scheme artificially moved money offshore to 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.”

Tax experts said such schemes had been used by firms to avoid corporation tax on foreign profits that are then paid back to the UK parent firm.

Hundreds of companies sought to exploit complex international treaty rules designed to facilitate global trade by making sure profits are not taxed twice in different jurisdictions.

Under rules designed to prevent double taxation of company profits, companies can claim credit for tax paid on money they made overseas.

But Next switched funds from one company to another in an arrangement HMRC referred to as “complex circular movements of money between companies in the same group, so they can claim there has been double taxation”.

This is the second rate-booster case to reach the FTT after the tribunal ruled against P&O in 2013, which was accused of moving profits to avoid tax before its takeover by the Dubai-based DP World.

The P&O scheme would have secured £14m in tax relief. It was devised in 2004 by P&O, the ports business that was then independent and listed on the London Stock Exchange.

HMRC said about £130m in tax was at stake across 20 rate-booster cases, which were waiting on the P&O and Next decisions. About 70 rate-boosters have already been conceded by companies rather than go to court, which has brought in more than £500m in tax.

Legal changes in 2005 and 2009 mean rate-booster schemes are no longer possible or attractive.

Next, whose chief executive is Tory peer Lord Wolfson, said it had paid the tax owed to HMRC “some years ago” and that this had been fully accounted for at the time.

Referring to looser transfer pricing rules brought in by the last coalition government, the retailer went on to describe the dispute with HMRC as “a technical debate around complex legislation” which had now been superseded.

The Next statement added that current UK law generally allowed companies to “repatriate their profits without a tax charge”.