Marks and Spencer Gets to Have its Teacake and Eat it
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It has taken a 12-year struggle, but Marks & Spencer seems to have finally
won its battle with HM Revenue & Customs to recover £3.5m in overpaid VAT on
chocolate teacakes. The European Court of Justice has recently ruled in favour
of M&S, saying that it should be allowed to claim the VAT back.
The fight started in 1994 when M&S made a claim for overpaid VAT on chocolate
teacakes. Up to that point, HMRC had viewed these as a standard-rated biscuit
and M&S had accounted for VAT on them from 1973 to 1994. In a letter dated 30
September 1994, the then HM Customs & Excise acknowledged their error, and
agreed that the chocolate teacakes were indeed cakes and not biscuits, and
In February 1995, M&S submitted a claim for overpaid VAT to the Commissioners
for £3.5 million. That claim was accepted only to the extent of 10% of the
amount (£350,000), since the Commissioners took the view that M&S had passed on
90% of the VAT paid by it to its customers. Consequently, the Commissioners
invoked the defence of unjust enrichment under section 80(3) of the VAT Act
1994. The authorities also applied the then newly introduced three year capping
provisions and said they were not obliged to repay any sum which had been paid
to them more than three years prior to the submission of the claim for
repayment. The amount which was finally paid to M&S on 4 April 1997 was
M&S appealed to the VAT and Duties Tribunal, and in 1998 it upheld the view
taken by the Commissioners. M&S appealed to the High Court, which, in turn,
dismissed the claim in December 1998. An appeal against that decision was made
to the Court of Appeal which again dismissed M&S’s claim. However, in 1999, the
Court of Appeal referred a question which related to a separate aspect of the
proceedings (the taxation of gift vouchers sold by M&S) to the ECJ for a
preliminary ruling on the compatibility of the retroactive introduction of a
three year cap with the principles of effectiveness of Community law and of the
protection of legitimate expectations. That question concerned the issue of
whether an individual could derive rights directly from a Directive after it had
been correctly transposed into national law, where the Member State had failed
to take proper account of the scope of the Directive.
In Case C-62/00 Marks & Spencer  ECR I-6325, the ECJ
ruled that the principles of effectiveness and of the protection of legitimate
expectations precluded national legislation such as the UK legislation in
question. Following this decision, the Commissioners accepted that M&S’s claim
should not be time barred, and accordingly repaid the sum claimed, up to the
limit of 10% (£350,000), above which they maintained that there would be unjust
enrichment. M&S appealed the High Court’s decision regarding unjust enrichment
to the Court of Appeal, and in October 2003 it found against M&S, which again
appealed the matter to the House of Lords. The House of Lords, in turn, referred
the matter to the ECJ.
The complexity of the legal battle lay in the different treatment the
Commissioners placed on businesses classed, until 2005, as ‘repayment' and
‘payment' traders. While M&S was classed as a ‘payment trader' which owed VAT to
HMRC at the end of a financial quarter, it argued that the main supermarkets,
which were owed VAT by HMRC, were treated differently on the issue of chocolate
M&S argued that the defence of unjust enrichment was applied to its valid
claim for wrongly paid tax, but the same defence was not applied to block
comparable claims made by its competitors, contravening the European law
principles of equal treatment and fiscal neutrality.
In January 2008 Advocate General Juliane Kokott backed M&S stating:
'The objection that Marks & Spencer has been enriched cannot be invoked as
long as it offends the principle of equal treatment.'
The case then moved on the ECJ, and on April 10 2008, they released their
decision stating firstly:
‘Member State has maintained in its national legislation an exemption with
refund of input tax in respect of certain specified supplies but has
misinterpreted its national legislation, with the result that certain supplies
which should have benefited from exemption with refund of input tax under its
national legislation have been subject to tax at the standard rate, the general
principles of Community law, including that of fiscal neutrality, apply so as to
give a trader who has made such supplies a right to recover the sums mistakenly
charged in respect of them.'
The court went on to state:
‘the principle of fiscal neutrality precludes the prohibition of unjust
enrichment from being applied only to taxable persons such as ‘payment traders'
and not to taxable persons such as ‘repayment traders', in so far as those
taxable persons have marketed similar goods. It will be for the national court
to determine whether that is the position in the present case. Furthermore, the
general principle of equal treatment, the infringement of which may be
established, in matters relating to tax, by discrimination affecting traders who
are not necessarily in competition with each other but are nevertheless in a
similar situation in other respects, precludes discrimination between ‘payment
traders' and ‘repayment traders' which is not objectively justified.'
‘it is for the national court itself to draw any conclusions with respect to
the past from the infringement of the principle of equal treatment'
End in Sight?
In summary, the ECJ ruled that, in principle, VAT had to be repaid in full,
but left the final decision to the British courts. That final decision will be
taken by the House of Lords, and HMRC said it was too early to make a comment. A
“This is a very complex judgment on which it would be premature to make any
comment until the House of Lords has handed down its judgment.'
In contrast, M&S welcomed the ruling stating,
‘We are pleased with the outcome which endorses our position.
We’re optimistic that the House of Lords will now find in our favour and hope
that this will conclude the matter and draw a line under this protracted
Tony McClenaghan, head of indirect tax at Deloitte, which acted for M&S,
described the ECJ decision as a “sweet victory". He said:
'Common sense has prevailed. It is unreasonable for different retailers to be
treated differently in relation to similar transactions. The fact that the UK
authorities changed the law in 2005 suggested that comparable situations had
previously been treated differently,'
So, despite HMRC’s reticence it would appear likely that the never-ending
saga of the chocolate teacakes, which seems to have run longer than ‘The
Mousetrap' is finally near its end, and that M&S will get its £3.5 million
refund (no doubt with a vast amount of interest). The details of the decision
are very interesting, and the full decision is worth reading.
About the Author
Steve Allen is the
Director of VAT Solutions (UK) Ltd, an established independent firm of Chartered
Tax Advisers, formed by Andrew Needham and Steve Allen. Both not only are
respected tax advisers, but have worked for both Customs & Excise and one of the
top four accountancy firms for many years. This mean that their team know both
sides of the equation and are truly experts in this field.
The company has a cross-section of clients from multi-national companies
through to medium-sized and numerous smaller regional firms of accountants and
solicitors. They produce a regular publication 'VAT Voice', which can be
downloaded directly from their website
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Article Published/Sorted/Amended on Scopulus 2008-07-29 13:23:51 in Tax Articles