N Brown : HMRC VAT update

13 November 2018

N Brown Group plc ('N Brown' or the 'Group')

VAT Partial Exemption - receipt of draft Tribunal decision

Background

As detailed in previous announcements, N Brown has been in a long running dispute with HMRC with respect to the VAT recovery of certain marketing costs. N Brown has consistently contended that as its marketing expenditure principally relates to the sale of goods (which is VAT standard-rated), rather than the provision of financial services (VAT exempt), it is entitled to recover VAT on the vast majority of these costs. HMRC has argued that as these marketing costs relate to both to the sale of goods and financial services, a substantially higher portion of VAT is non-recoverable.

Within our FY18 year-end VAT debtor was an asset of £43.8m which had arisen as a result of cash payments made under protective assessments raised by HMRC, and the Group had previously advised that a further £10m was expected to be paid under this assessment in the current financial year. Based on the continued advice of external tax advisors, together with legal counsel's opinion on certain elements of the cost allocation, the Group has consistently believed that it would recover this amount in full from HMRC and has been engaged in a legal process to do so.

The case was heard in a first tier VAT tribunal in May 2018 and related to the period 2006-2016. The Group has now received a draft decision from the Tribunal, which is currently being assessed in detail. It is anticipated that the ruling will be issued in final form shortly, pending detailed liaison with both the Tribunal and HMRC on its contents.

Draft decision

The draft ruling has mixed implications for N Brown and we are disappointed by the current outcome. The case has two key aspects, those being attribution and apportionment. With respect to attribution, the Judge agreed with HMRC, finding that when the Group is marketing goods it is also in effect marketing financial services, even if there is no reference to this in its marketing materials.

The Judge however ruled against HMRC and directed that in apportioning costs via a turnover ratio, vatable product turnover should be included in full, but VAT exempt financial services income should in part be excluded to the extent that it did not relate to the original marketing activities.

Financial impact

While the financial implications of this ruling for N Brown remain uncertain pending its ultimate outcome, the Group expects that irrecoverable VAT on its marketing costs will increase by between £6m to £9m per annum on a full-year basis from FY20, with a proportionately lower impact anticipated for FY19. 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.

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. A repayment to the Group of some element of previous cash payments is expected in due course.

Next steps

N Brown is considering its position with respect to an appeal on the decision. As instructed by the tribunal we will continue to work with HMRC to agree, on a reasonable basis, an apportionment. It is anticipated that further announcements on this matter will be made in due course.

For further information:

N Brown Group Steve Johnson, Chief Executive Craig Lovelace, Chief Financial Officer Simon Bielecki, Investor Relations 0161 238 1845 MHP Communications Andrew Jaques / Simon Hockridge / Ollie Hoare 0203 128 8789 [e-mail]