FTSE listed discount stationery retailer TheWorks has warned it is facing a potential tax bill following an HMRC investigation into the use of zero rated import duty
TheWorks confirmed that HMRC had conducted a review of the import duty paid by the company over the last three years, which has now been completed, focusing on the company’s use of zero rate import duty.
HMRC identified underpaid duty estimated at £350,000, covering various product areas, including stationery, canvases and toys.
The concern was first reported to shareholders in the half yearly results for HI FY20 ending 27 October 2019.
In the H1 FY20 interim trading results, TheWorks stated: ‘A provision for underpaid duty of £350,000 relating to stationery, canvases, and toys has been made and included as an adjusting item in the period as there is a reasonable expectation that this amount will become payable.’
‘Work on reviewing over $19m (£14.5m) of purchases on toys, put through at zero duty is ongoing.
‘At this stage, we cannot determine a reliable estimate of the further potential obligation as this will vary depending on the duty rates attached to each item included within the HMRC review.
‘Based on our initial observations the additional expected liability is expected to be up to £500,000. We hope to have further certainty regarding this liability by the financial year end.’
The company also warned that it could face a penalty due to its treatment of withholding tax for a historic loan, predating the IPO, which could contravene tax rules. In 2018-19, debt costs were capitalised in relation to the previous debt facility of £386,000 and were written off as a non-cash, adjusting item at the time.
‘While this treatment is considered correct, there is a possibility it may be challenged,’ TheWorks warned. ‘No provision has been made for interest/penalties should this approach be challenged. It if were to be successfully challenged, the expected interest/penalties due would be in the range of £100,000-£200,000 [for year end April 2019]’.
The Group’s total income tax charge for the year ended 28 April 2019 was £1,205,000 (2017-18: £787,000) with reported revenue of £217.5m (FY18: £192.1m), up of 13.2%, driven by 50 new shop openings, bringing total shop inventory to 497, although the company has said it has no plans to add more retail stores.
There was also a management shake up as Kevin Keaney resigned after almost nine years as CEO of the company and was replaced by chief financial officer Gavin Peck, who joined The Works in April 2018. Prior to The Works, Peck was commercial director at Card Factory plc where he was responsible for the commercial function alongside leadership of the commercial finance team. Rosie Fordham, currently head of finance, has been appointed as interim CFO.
KPMG has been external auditor of TheWorks.co.uk plc since it listed in 2018, and earned £144,000 for audit of the group and subsidiaries, and audit-related assurance services. It also advised on the IPO and was paid £495,000 on assurance advisory work on the IPO, according to the annual report 2019.
The chair of the audit committee is Harry Morley, who is also a senior independent non-executive director. The current lead audit partner at KPMG is Tony Sykes, who was appointed in 2019. Internal audit is handled by mid-tier firm, Grant Thornton.