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EU court adviser Juliane Kokott has said in a non-binding but highly influential legal opinion that Marks & Spencer plc should receive a full refund instead of the part refund offered by the British authorities.

EU Member States may maintain in force derogations as a transitional measure, subject to certain conditions under Article 28(2) of the Sixth VAT Directive. The UK applies a zero-rating for VAT in respect of the supply of food, in conjunction with the right to deduct input tax.

Confectionery is an exception to such favourable tax treatment and is taxed at the full rate. There is an exception to that exception for cakes and biscuits, which are subject to the zero rate of tax applying to food. Biscuits wholly or partly covered with chocolate, however, are regarded as confectionery and taxed accordingly at the full rate.

Unjust enrichment 

Since 1973 VAT had been charged on the chocolate covered marshmallow teacakes sold by Marks & Spencer plc at the standard rate as HMRC treated them as chocolate-covered biscuits.

In September 1994, however, the Commissioners acknowledged that the teacakes ought to have been classified as cakes and, as such, zero-rated for tax purposes.

Marks & Spencer made a claim in that respect for repayment of the full £3.5 million of VAT for which it had wrongly accounted over the years.

HMRC submitted as a defence that Marks & Spencer had passed on 90 per cent of the VAT to its customers and that a full refund would mean “unjust enrichment” for the retailer.

The VAT and Duties Tribunal upheld the HMRC defence and ruled that Marks & Spencer was entitled to recover only the 10 per cent of the sum claimed that had not been passed on to the public.

The House of Lords wanted to clarify whether the “unjust enrichment” defence could be invoked to refuse a full refund of VAT under existing, non-harmonised tax legislation.

Equal treatment and fiscal neutrality 

Advocate-General Kokott said that the question of whether a mistake had been made in the original classification of chocolate covered teacakes was undisputed. She added that it was, however, necessary to establish whether M&S was entitled to a VAT refund in view of the fact that it had passed the VAT on to its customers.

Marks & Spencer pursued the dispute further to the Court of Appeal. The retail chain claimed that Tesco had obtained tax refunds on the same principle in the light of a revision of the tax treatment of mineral water and fruit juice. It argued that the “unjust enrichment” argument had not been invoked against Tesco, on the ground that the tax had been passed on to the customers.

The UK government did not provide information on a VAT refund to Tesco to the European Court, but the Advocate-General said that Tesco’s alleged refund was of no consequence to the application of the principle of neutrality. 

Kokott said, however, that if the tax authority charges tax at the standard rate on the supply of Marks & Spencer’s teacakes, but applies the zero rate of tax to comparable products of other suppliers, the principle of equal treatment and fiscal neutrality would be undermined.

Public interest 

Marks & Spencer had stressed that the refusal to grant it a refund would, in its view, lead to the unjust enrichment of the tax authority itself. It argued that its customers who ultimately paid the VAT that was not due were the persons entitled to the refund.

The UK authorities maintained that they had used the wrongly raised tax revenue in the public interest, with the result that the customers of Marks & Spencer also derived benefit from it.

Kokott said that EU Court should not get involved in deciding whether the UK government or Marks & Spencer was better able to spend the £3.5 million in VAT in the public interest.

Related links

• European Court of Justice
• Opinion - Case C‑309/06 Marks & Spencer plc v HM Customs and Excise