Next Distribution Ltd (NDL), part of the Next Group plc, claimed Industrial Buildings Allowance (IBA) on £19m it spent on construction of two buildings used for warehousing and other activities.

Under the old IBA system, an allowance which has now been withdrawn, businesses could write off some of their construction costs if the sites being built were used to subject goods to a process or to store goods on their arrival in the UK.

In the case, Next Distribution Limited, Next Group Plc, The Paige Group Limited Appellants v The Commissioners For HMRC [2014] UKUT 0227 (TCC), HMRC said that it refused Next’s claim for the allowance on the grounds that unpacking bulk deliveries and repackaging them in smaller packages was beyond the scope of the allowance.

The operations at the buildings in this case essentially involved the receipt of very large quantities of complete garments and other goods in bulk cases, their storage and the unpacking of the garments and other goods into smaller packages for delivery to retail outlets and online customers.

The Upper Tribunal also felt that 'the fact that it is done on a very large scale, and to a great extent by automated mechanical means, does not affect the essential characteristics of the operation'.

In delivering the ruling, Justice David Richards said: ‘In my judgment, the imported goods were purchased by NRL [Next Retail Ltd] and delivered to the buildings for storage by NDL, a company in the same group. The goods cannot be said to be in transit to their ultimate purchaser. They have been received by their ultimate purchaser.

'Goods which are purchased by online customers will be sent directly to those customers and goods destined for sale in retail shops will be extracted from the bulk containers and delivered to those shops.

'The fact that the storage is being undertaken by a separate company in the same group, just as it was in Copol Clothing, does not affect the position.’

The company’s appeal against the decision was dismissed by a First Tier Tribunal (FTT) and that decision has now been upheld by the Upper Tribunal. This decision leaves Next with a tax bill of around £2.8m.

Jim Harra, director general, business tax at HMRC, said: ‘HMRC’s decision to reject Next’s claim for this tax relief has now been backed by two tribunals.

‘This case shows that, when any business – large or small – tries to claim capital allowances beyond their intended scope, HMRC will challenge it, including through the courts if necessary.’