ECJ judgment in the M&S teacakes case

Monday 21 April 2008

The European Court of Justice (ECJ) has ruled in favour of Marks & Spencer (M&S) in their long running case concerning VAT charged on chocolate covered teacakes. So will M&S now be able to receive their refund?

What is the background to the case?

It isn't often that you overhear people on the bus talking about the intricacies of a VAT case, but that was the conversation heard this week by one of our staff as the long running saga of M&S teacakes made its way to the ECJ and hit the headlines.

The case concerns a reclaim for VAT overpaid by M&S between 1973 and 1994 on the sale of chocolate covered teacakes. Her Majesty's Revenue & Customs (HMRC) advised M&S to account for VAT at the standard rate on the teacakes for a number of years, but eventually acknowledged that they should have been classified as zero-rated. When their claim for a refund of VAT was refused by HMRC, M&S claimed that they had been unfairly treated because the unjust enrichment legislation preventing their refund applied only to businesses that were net payers of VAT and not to those that were in a net repayment position. Recognising this deficiency, the UK Government extended the legislation in 2005 to apply to both categories.

The Tax Story of the Week archive from 14 January 2008 contains more details of the background to this case.

In the European Court, several questions were put to the ECJ by the House of Lords, primarily relating to the principle of 'unjust enrichment'. The UK legislation states that where a person has paid an amount of VAT to HMRC which was not due to it, the amount has to be repaid to him or her. However, the VAT does not have to be repaid if HMRC can prove that to do so would unjustly enrich the claimant. Broadly, unjust enrichment arises where the claimant would receive a windfall. The key question for the ECJ was whether unjust enrichment can be discriminatory in its application to different categories of taxpayer (as was the case in the UK prior to 2005).

What was the ECJ's decision?

The ECJ's decision was given in reply to the five main questions put to it by the House of Lords. The Court's conclusions can be summarised as follows:

• Even though EU legislation may allow a Member State to have a zero rate, a taxpayer not does have a directly enforceable European Community (EC) law right to have supplies taxed at that rate
• However, if the national legislation allows for a supply to be zero-rated and that Member State has incorrectly interpreted its own legislation and wrongly required VAT to be accounted for at the standard rate, taxpayers have a right to claim a refund
• Although Member States can refuse repayment on the grounds of unjust enrichment, they cannot discriminate by applying the concept differently to different categories of business, such as those in a VAT payment or VAT repayment situation. This equality of treatment goes beyond businesses selling the same product, and extends to those that are 'not necessarily in competition but are similar in other respects'
• The principle of equal treatment must prevail, irrespective of whether the taxpayer has suffered any financial loss or disadvantage 
• It falls to the national court to determine the appropriate remedy (which itself must not be contrary to EC law) in cases where the principle of equal treatment has been infringed.

What does this mean for M&S?

The case has been referred back to the UK court to determine on a couple of points before repayment can be made. We would expect that the that the House of Lords will find in favour of M&S on the critical point of whether HMRC has allowed claims by repayment traders on "similar goods". The only other question that they need to decide upon is whether the means by which the infringement is remedied is in accordance with EC law; it is difficult to envisage a position where repaying the money would create such an infringement. Consequently, subject to those final steps taking place, this looks like a victory for the taxpayer.

It will also be interesting to see how the House of Lords deals with whether compensation is payable to M&S, and how it should be calculated.

Roger Burrows, Head of VAT at Grant Thornton says: "Any retailers who have had claims denied on the grounds of unjust enrichment prior to the change in law in May 2005, or who have not submitted claims because of the reduction in the time limits for claims, should review their position in light of the ECJ decision."

Grant Thornton UK LLP will be happy to provide assistance to anyone who thinks they may be affected by these issues.

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