MFI deal with Revenue sparks fresh cash worries

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The Independent Online

MFI revealed yesterday it was £22m better off after settling a long-running VAT dispute with the Inland Revenue. But the move only stoked speculation that the struggling furniture retailer needs further cash.

The group rushed the statement out after its shares plunged 28 per cent amid rumours that the board had called an emergency meeting on Wednesday evening.

Fears that the group, which is halfway through a strategic review, faces a cash crunch prompted a 22p drop in the share price, although news of the tax rebate later helped support the stock. The shares closed 8p lower at 69.5p.

In October the group announced it was in talks with its bankers over future funding arrangements. Since then several analysts have predicted the company will need to raise up to £100m through a rights issue to fund the strategic surgery that its new chief executive, Matthew Ingle, needs to perform. A spokeswoman said yesterday the company had "no idea" what had caused the stock to fall so sharply, and that its board had not met. "Our strategic review is still ongoing. We will say more at our preliminary results at the end of February," she said.

MFI dropped its legal action against HM Revenue & Customs after agreeing to settle its VAT dispute about the tax treatment of product warranties out of court. At issue was £60.5m the furniture retailer had paid the tax authorities, pending the outcome of its litigation. The Revenue will return £21.8m to MFI and keep the balance, leaving the group to write off £38.7m in its accounts for the year to 24 December.

The controversy centred on the guarantees MFI sold to customers on products from 2001 to 2004. Customs disputed MFI's decision to pay a lower rate of tax on sales of the warranties, compared with the normal 17 per cent VAT levied on furniture sales.

MFI, which has been fighting the case since 2003, said: "Taking into account the cost, timing, resource and risk involved with litigation, both parties have agreed to settle." It expects to receive the cash next month.

Richard Ratner, the retail analyst at Seymour Pierce, said the settlement was positive as it released £22m that the tax authorities could have ended up keeping. He said: "The company needs the odd £20m in cash if what we are currently hearing about trading is true. He said "a number of respectable trade sources" had suggested MFI's like-for-like orders had shown a "large decline" since the start of the year.

"We believe that MFI will announce a pretty radical downsizing exercise, which, apart from asset write-offs, will require a fair bit of cash - maybe around £100m. We therefore look for a fundraising at 50p, which, going forward, would be dilutive."