European Court's teacake ruling is sweet victory

Marks & Spencer tasted victory yesterday in a long-running legal battle with HM Revenue & Customs over £3.5m of overpaid value-added tax on chocolate teacakes. The European Court of Justice ruled in favour of M&S in the dispute, which spanned 12 years and took two trips to the European Court.

The legal action arose because chocolate teacakes were wrongly classed as biscuits from 1973, when VAT was introduced, until 1994 when HMRC admitted they were cakes after all.

In the UK, baked products such as bread, cakes and flapjacks are free of VAT but the tax is charged on cereal bars and partly or wholly coated biscuits.

HMRC argued that repaying the full amount would "unjustly enrich" M&S because about 90 per cent of the tax had been passed on to customers. M&S argued that the same defence was not applied to claims made by its competitors, who were refunded without question. HMRC distinguished between "payment traders" who owed VAT to the Treasury and "repayment traders" who were owed VAT. M&S was classed as a payment trader and had its claim refused.

The European Court ruled that the defence of unjust enrichment cannot be invoked against a taxpayer if it goes against the principle of equal treatment. The Government had already amended the law in 2005 to make the application of unjust enrichment consistent.

M&S said it hoped the House of Lords would follow the European Court and find in its favour.