Following a hotly disputed 12 year litigation, the European Court of Justice has determined that Marks & Spencer’s Chocolate Tea Cakes will cost the Treasury the princely sum of £3.5m.
That is the price of a very expensive mistake regarding VAT determined by tax officials. Customs & Excise (as it was then) having originally classified such teacakes as chocolate biscuits have finally accepted this was a mistake as the teacakes have in fact been determined to be chocolate cakes not biscuits. For all legal biscuit watchers this will come as not surprise given that the European Courts have already ruled that Jaffa Cakes are in fact cakes and not biscuits as had been classified.
The key point from a tax perspective is that where as biscuits are subject to standard rate VAT of 17.5% cakes incur no VAT liability. By the time the error was corrected, Marks & Spencer’s had paid a total of £3.5m in VAT which they are now entitled to reclaim from HMRC.
Beyond the obvious consequences for Marks & Spencer’s this decision has potentially significant consequences for any business, which have been denied repayment or a claim for overpaid VAT on the basis of a defence of unjust enrichment by HMRC. This is a defence, which HMRC has tended to use on the basis that the majority of the tax liability has been passed onto the businesses customers, and so to refund the entire amount of tax to the business would be to unjustly enrich them given the customer having borne the burden of this liability. The ECJ has now indicated that the taxpayers who have wrongly been met by a defence of unjust enrichment should receive a repayment of their overpaid VAT. Further there are obvious implications for the numerous businesses that have not pursued a claim for a deduction or have not pursued a claim for repayment of tax because HMRC has asserted it would be an unjust enrichment to repay them. There must be many such businesses and there must therefore be a potential scope for a wide range of claims for overpayment to be made over and above those which obviously follow the zero rated supplies facts of this case.
Finally to address the point of most interest the difference between a tea cake and a biscuit is subject to the House of Lords agreeing with the ECJ verdict which will draw a line under this dispute and place tax payers’ claims for reimbursement of tax mistakes in the same position as those of European Government and in that bring about true equality.
For those of us with a sweet tooth however it remains open to debate whether Marks & Spencer’s will reduce its teacake prices.
