KITCHEN and bathroom furniture giant MFI revealed yesterday that it is to fight a £28.5 million tax bill for warranties it sold, in a battle that might have substantial ramifications for the whole sector.
The assessment by the government’s customs office is the latest in a series of disputes over the amount of tax paid by furniture retailers on sales of warranties.
MFI pays a lower rate of tax on sales of warranties than on the sale of furniture.
The group said: "MFI has taken extensive legal and taxation advice and believes that HM Customs and Excise does not have a valid claim." MFI added that it would contest the claim vigorously.
The company said it had not made any provision in its accounts for the bill, which covers sales of warranties from August 2001 to December 2002, but it could pay the bill without having to raise cash.
MFI said: "Should it become necessary to pay the assessment, it will be paid in full from existing cash resources within the appropriate time limits."
MFI’s shares closed up 2.75p, or 2.4 per cent, at 118.5p as the market largely accepted its assurances on the tax issue.
MFI shares have lost nearly 12 per cent of their value since the start of November, outperforming the retail index by 6 per cent.
John Stevenson, a retailing specialist with ING Financial Markets, said the news was unsurprising because other retailers had already been affected and MFI had warned investors in February that it might face a bill from customs.
Stevenson said: "They [the retailers] have all disclosed the element of value added tax [VAT] benefit they’ve received and in the case of MFI, they’ve got cash on the balance sheet. It’s not as big an issue for MFI as perhaps it would be for other retailers."
MFI played down the risk of tax liabilities in November after its shares were hit when smaller rival Homestyle said it had been challenged by the customs office over the amount of tax it paid on sales of warranties.
Homestyle said in late October that it could face a bill of up to 23.2 million, leading analysts at broker Oriel to predict MFI might face a similar charge of about 18 million.
Customs has also challenged the way that Courts paid taxes on sales of warranties.
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