The Shop Direct Group – Corporation Tax on reclaimed VAT

August 2014

In a relatively high profile case, shop direct group (SDG) has lost its third successive challenge to HMRC’s argument that it should pay corporation tax on £300m of VAT repayments and related interest. The latest court of appeal ruling has upheld earlier decisions which backed HMRC’s position that VAT repayments received by SDG represented part of its trading income and therefore should have been subject to corporation tax.

This case will have implications for many tax payers and although further litigation is likely, taxpayers who have received a VAT repayment (possibly with interest) or hope to receive a VAT repayment should seek tax advice in order to consider their position.

The basic facts of the case are as follows:

  • SDG discovered that they had incorrectly accounted for VAT on certain retail sales at a number of companies within the group.
  • The company made a claim for a repayment of VAT in the sum of c£125m.
  • In addition to receiving this repayment the company also received interest in the sum of c£175m.
  • As the repayment was of VAT previously paid the group treated the receipts as being outside the scope of corporation tax.
  • HMRC disagreed. They contended that the repayment of VAT arose out of the group’s trading activities and should be included within their trading receipts for corporation tax purposes. Furthermore, they contended that the statutory interest received represented a taxable loan relationship credit.

HMRC’s latest victory in the case would suggest that they are in pretty strong position should the group wish to take it to the Supreme Court.

Please note this case does not necessarily mean that refunds of VAT arising from reclaimed input VAT are taxable.

This case highlights the need for businesses to take quality professional advice in connection with their VAT affairs so as to account for VAT correctly the first time around. Specifically advice should be obtained when a business includes VAT in its headline price rather than stating the cost plus VAT.

Our specialist tax team includes both corporation tax and VAT specialists who can provide your business with combined commercial tax advice. If you have received a VAT repayment, or you are about to apply for a repayment please contact us to start the advisory process.  

To learn more, please contact Gemma McCaldon-Gower at gemma.mccaldon-gower@mitchellcharlesworth.co.uk

 

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