JJB accounting errors revealed as it seeks new owner

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Poor financial controls and accounting mistakes at JJB Sports left the beleaguered sportswear chain owing HM Revenue and Customs more than £5m recently.

The Independent has learnt that the retailer, which remains on the verge of being sold out of administration to a new owner today, made errors relating to VAT payments on children's and adult clothing and footwear from leading brands such as Nike and Adidas.

The bulk of the errors, which continued at JJB for four years until 2010, related to clothing for children aged 14-plus. Children's clothing is exempt from VAT.

For example, this meant that when JJB wrongly coded these items, such as with a zero-rating for VAT, this contributed to a significantly lower tax bill payable to HMRC.

This is merely the latest mishap to rock JJB, which has been cleared in a series of Office of Fair Trading and Serious Fraud Office investigations over the past four years.

The VAT accounting mistakes come as JJB remains locked in talks with rival Sports Direct about rescuing the business. Mike Ashley's Sports Direct remains interested in buying part of JJB, but up to half of the Wigan-based chain's 180 stores could close. Dublin-based Stafford Group, a retail-to-shipping conglomerate, is also waiting in the wings if Sports Direct is unable to strike a deal.

Any rescue of JJB is expected to be through a pre-pack administration, which would allow a new owner to slash its debts and dump unprofitable stores.

Emails in July and August 2010 show JJB personnel discussing HMRC guidelines regarding VAT on specific clothing categories and how the company should proceed.

Documents show that 3,463 items were erroneously coded between 2006 and 5 August 2010, which led to a £5.46m total of VAT undeclared. However, it also incorrectly charged customers £404,162 VAT, which left it with a "net amount payable" to HMRC of £5.05m.

JJB and HMRC declined to comment. But the troubled retailer's annual report for the year to 29 January shows an "HMRC provision" of £5.32m, which is understood to relate to the VAT mistakes. JJB is thought to have paid back the bulk of the outstanding amount, and suitors looking to acquire the retailer are aware of the liability.

Dave Williams, who joined the board as finance director in January 2011, is understood to have made HMRC aware of the VAT mistakes in July of that year.