N Brown Group PLC (LON:BWNG) said it is considering an appeal against a draft tribunal ruling in favour of HMRC in a long-running dispute over VAT on certain marketing costs.
The retailer, which owns JD Williams and Simply Be, had argued that it was entitled to recover VAT on the vast majority of its marketing costs since they mainly related to the sale of goods.
However, HMRC said a substantially higher proportion of VAT cannot be recovered because the marketing expenses relate to both the sale of goods and financial services.
The sale of goods carries standard VAT while financial services are exempt from the tax.
The case was heard in a first tier VAT tribunal in May 2018, covering the period of 2006 to 2016.
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The company said a draft decision from the tribunal has “mixed implications for N Brown and we are disappointed by the current outcome.”
The case has two aspects, attribution and apportionment.
The judge has agreed with HMRC on attribution, saying when N Brown is marketing goods is in effect marketing financial services.
However, N Brown said the judge ruled against HMRC and directed that “in apportioning costs via a turnover ratio, VAT-able product turnover should be included in full, but VAT exempt financial services income should in part be excluded to the extent it did not relate to the original marketing activities”.
N Brown expects to pay an additional £6mln to £9mln in marketing costs from 2020 following the ruling.
“The group will be seeking to mitigate as much of this cost increase as is possible through continued operating efficiencies and as such remains comfortable with market expectations for the current year,” it said.
“Furthermore, the group is currently assessing an anticipated material non-cash exceptional charge to the income statement in FY19 relating to a partial impairment of the existing VAT debtor.”
N Brown said it was “considering its position with respect to an appeal on the decision”.
Shares dropped 2.2% to 131.2p in morning trading.