M&S Challenges the Taxman’s Latest Strike

Noura Aboud

M&S has recently made headlines with its claim that the latest budget announcement is effectively a "raid" on retailers, adding to the already mounting financial pressures in the sector. But beyond the headline-grabbing language, what are the real legal and commercial risks? The budget introduces sweeping changes, from higher business rates to extended corporate tax liabilities, leading UK retailers to reassess their financial and legal strategies.

A Hike in Business Rates

With less than two months until the budget plans take effect, the Chancellor’s decision to increase business rates by 6% is raising significant concerns for M&S and similar retailers. Business rates are taxes levied on companies based on the value of the properties they occupy. In light of the post-pandemic decline in physical shopping, these valuations (some dating back to 2015) no longer reflect current market conditions. Furthermore, such hikes impact competition for high-street retailers, with online retailers such as Amazon paying far less. This raises a critical legal question: Should the government continue to enforce a tax burden based on outdated property valuation systems?

Given the strong reaction from M&S’s CEO, who described the decision as a “raid,” there is a possibility that M&S may challenge the rise. After all, M&S is no stranger to challenging the taxman, having previously taken on HMRC in 2014 in the landmark case Marks & Spencer plc v. HMRC regarding VAT treatment on teacakes, which resulted in them reclaiming millions in overpaid tax.

As such, M&S could challenge the business rates hike by filing for a judicial review, arguing that the property valuations are unjust and violate the principles of fair taxation. If successful, this could not only reduce their immediate tax burden but also set a legal precedent for other high-street retailers facing similar issues. Judicial review, while a complex and expensive process, has seen success in previous cases such as R (on the application of Tesco Stores Ltd) v. The Valuation Officer (2017), which involved challenges to outdated tax assessments. This suggests that there is scope for arguing that the current business rates system no longer reflects fair market realities.

Another Green Initiative?

The M&S CEO also called attention to the Extended Producer Responsibility (EPR) Scheme, a new sustainable initiative that holds businesses accountable for the full lifecycle of their packaging, from production to disposal. Under the scheme, companies like M&S, with a vast portfolio of packaged food and consumer goods, will be directly impacted. The policy mandates that businesses cover the costs of recycling and disposing of their packaging, and failure to comply with recycling obligations could result in substantial penalties. This is not just another "green" initiative; retailers will be legally required to meet environmental standards or face fines, making compliance both an ethical and legal responsibility.

M&S and other retailers will need to invest heavily in compliance infrastructure to ensure they meet the evolving standards. Additionally, they may need to address cross-border regulatory issues, particularly as the EPR scheme is expected to differ from current EU regulations. For example, while the EPR scheme focuses on businesses taking responsibility for post-consumer packaging, EU regulations place greater emphasis on producer responsibility and waste management at the collection stage. This discrepancy could create complications for retailers operating in both markets, potentially hindering seamless operations.

While the EPR scheme presents new challenges, it could also be a commercial opportunity. With law firms likely seeing an uptick in demand for restructuring and compliance requirements, M&S can strategically navigate these regulatory changes.

Stricter Corporate Tax Enforcement

The tightening of corporate tax enforcement brings increased scrutiny to multinational businesses like M&S, particularly in relation to international tax strategies. The expanded General Anti-Abuse Rule (GAAR) and the Diverted Profits Tax (DPT) are now being applied more aggressively, putting M&S in the spotlight. The GAAR allows HMRC to challenge any tax avoidance arrangements that it considers aggressive or artificial. The DPT targets businesses that divert profits out of the UK to avoid tax, applying even stricter measures. With these new rules, M&S could face audits of its cross-border tax practices, leading to hefty financial penalties and significant reputational damage.

M&S must act swiftly to ensure that all of its international tax strategies comply with these stricter enforcement measures. This might involve revisiting transfer pricing arrangements or restructuring parts of the business to avoid triggering scrutiny. Commercial law firms will play a key role in helping M&S navigate these new challenges, advising on how to keep tax filings watertight and avoid drawing the attention of HMRC. Legal experts may also assist in negotiating settlements or engaging in proactive dispute resolution, preventing costly litigation and shielding M&S from further penalties.

Conclusion

The changes brought by the new fiscal policies highlight the intersection between politics and commercial impacts. As aspiring solicitors, it will be exciting to recognize the different roles we could play in advising companies like M&S on mitigating penalties and ensuring compliance across various regulatory frameworks. Keep an eye on how M&S responds in the coming months and which law firms will step in to assist!