Retailer held to account over corporation tax bill

The Court of Appeal has ruled that a member of an online retail group must pay corporation tax on VAT repayments, in a judgment that could safeguard up to £800 million for vital public services.

England and Wales’ second most senior court has upheld earlier decisions in both the Upper Tribunal and First Tier Tribunal that Shop Direct Group should pay tax on both the repayments and related interest payments. The repayments were made by HM Revenue and Customs (HMRC) after various companies within the Shop Direct group of companies made claims for incorrectly paid VAT.

The Court of Appeal backed HMRC’s position that the repayments represented part of Shop Direct Group’s trading income, and as such corporation tax should be paid on them.

HMRC also successfully argued that, under rules governing the taxation of corporate debt arrangements known as Loan Relationships, the statutory interest on the repayments was also liable to corporation tax.

Taking into account the significant number of follower cases, the ruling is set to protect over £300 million in tax. If the Court of Appeal had ruled in favour of Shop Direct Group, a further £500 million of tax could have been put at risk.

Jim Harra, Director General Business Tax, HMRC, said:

"This case shows that HMRC does not hesitate to take big businesses to court, if necessary, to ensure they pay their share of tax, like everyone else.

“The Court of Appeal’s ruling means that HMRC’s position has now been backed by three courts. Other businesses have refused to pay corporation tax on the same grounds as Shop Direct, and on behalf of all taxpayers we will ensure they too pay what they owe."

Notes to editors

1. The 11 March 2014 ruling by the Court of Appeal in Shop Direct Group et al vs HMRC can be read at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWCA/Civ/2014/255.html&query=shop+and+direct+and+group&method=boolean
2. The First Tier Tribunal earlier ruled in HMRC’s favour on 14 February 2012. This judgment can be read at http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=6206.
3. This decision was then upheld by the Upper Tribunal on 19 April 2013 and can be read at http://www.bailii.org/uk/cases/UKUT/TCC/2013/189.html
4. Shop Direct Group, the unlimited company which received the VAT repayments, no longer trades. It is a member of the Shop Direct group of companies, more members of which had appealed unsuccessfully to the Upper Tribunal.
5. Follow HMRC on Twitter @HMRCgovuk
6. HMRC's Flickr channel: www.flickr.com/hmrcgovuk