The charity wants to claim the money because a case involving the Children's Society in 2005 set a precedent, enabling third sector groups to reclaim VAT incurred on fundraising for unrestricted income (Third Sector, 3 August 2005).
Oxfam has already used the precedent to recover its unrestricted fundraising costs. However, it is now arguing that the precedent means the written agreement it has with HMRC setting out how the VAT it pays is calculated should be updated.
Updating the equation would mean that Oxfam was owed a second tranche of rebate that could also be retrospectively claimed back to 1997 - making it likely to be a seven-figure sum.
But in a VAT tribunal held last week, HMRC argued that reimbursing Oxfam according to an altered equation would not be in the public interest and would effectively be illegal.
Russell Moore, VAT partner at accounting firm Saffery Champness, which is representing Oxfam, said: "It's disappointing that a charity has to appeal to the VAT tribunal to recover VAT because HMRC wishes to retrospectively go back on an agreement.
"Should HMRC be successful, charities can have little confidence that VAT recovery methods they have in place are worth the paper they are written on."
The tribunal is expected to announce its decision by the end of July. HMRC said it would comment then.