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HMRC Can't Have Its (Tea)Cake And Eat It, Says EU Court Advisor

by Ulrika Lomas,, Brussels

18 December 2007

An Advocate General to the European Court of Justice has sided with UK retailer Marks and Spencer in its battle to have overpaid VAT on the sale of teacakes refunded by the UK tax department.

What should have been a storm in a teacup, the legal battle between M&S and the UK customs authorities has dragged on for several years and gone to the highest court in the UK, and from there to the European Union's top court.

The dispute centres on the classification of certain foodstuffs for VAT purposes - often a source of conflict between retailers and the government in the UK (who can forget the furore over the classification of 'Jaffa Cakes'?). Generally, the supply of food is zero-rated in the UK for VAT purposes. However, confectionery is an exception to this rule, and chocolate covered biscuits are considered to be confectionery in such cases, and therefore face standard rate VAT.

Marks & Spencer, following these rules, accounted for VAT in their sale of the teacakes. But in 1994, the UK tax authority suggested that the product had been mis-classified, and should have been deemed a cake, therefore qualifying for the zero VAT rate.

The retailer has thus far been unable to prove that it is entitled to a GBP3.5 million refund (based on sales of the teacakes from 1973), and has received only GBP88,440 from Customs, which argues that the majority of the additional cost stemming from the VAT has been passed on to consumers. However, in a decision issued last week, Advocate General Juliane Kokott concluded that the claim did not constitute unjust enrichment, as claimed by the UK government.

"The objection that Marks & Spencer has been enriched cannot be invoked as long as it offends the principle of equal treatment," Kokott's ruling stated.

Decisions by Advocates General are not binding on the European Court, but tend to be taken up in the most cases.

The ECJ's final ruling is expected to be handed back to the UK's House of Lords next year.

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