Marks And Spencer Savours Victory In Battle Of The Teacake

by Robin Pilgrim, LawAndTax-News.com, London

09 February 2009

UK retailer Marks and Spencer has won a long legal battle with HM Revenue and Customs which hinged on the classification of teacakes for value-added tax purposes.

Affirming a decision by the European Court of Justice last year, the House of Lords ruled on February 4 that M&S was entitled to a full refund of VAT paid in respect of teacakes from 1973, when the tax was first introduced, until 1994, when it won its initial victory against the then Customs and Excise.

The dispute centred on whether M&S's marshmallow-based chocolate teacakes were 'cakes' and therefore zero-rated for VAT purposes because they are classified as 'food,' or whether they were chocolate covered biscuits, which are considered a 'luxury' by the tax authorities and therefore subject to VAT.

However, while the UK tax authorities eventually accepted that the high street retailer had wrongly overpaid tax on chocolate teacakes over a number of years, they argued that repaying the full amount of the tax would ‘unjustly enrich’ M&S, because about 90% of the VAT had been passed on to customers – a reading of the situation with which the ECJ judges disagreed on the grounds that similar claims by retailers had been upheld.

The case was referred back to the House of Lords to allow HMRC to argue some legal technicalities, but the Law Lords announced that the tax authority had finally decided to throw in the towel.

M&S is expected to be reimbursed the GBP3.5m it overpaid in VAT, in addition to interest. HMRC may also have to pick up the company's legal costs.

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