M&S teacakes - opinion from the advocate general

Monday 14 January 2008

The Advocate General has given a favourable Opinion in the case involving Marks & Spencer and their long running battle to reclaim VAT on the sale of teacakes. What is this case about and how could the recent opinion from the Advocate General affect other VAT repayment claims?

What is the background to the case?

The case concerns Marks & Spencer Plc (M&S) and their attempt to reclaim VAT paid on the sale of chocolate covered teacakes.

From 1973 (when VAT was introduced in the UK), M&S was required to account for VAT at the standard rate on the sale of their teacakes. This was on the grounds that Customs regarded the teacakes as confectionary. However, in September 1994 Customs acknowledged that the teacakes ought to have been classified as cakes and consequently zero-rated for VAT purposes. M&S made a claim for a repayment of the VAT which had been wrongly accounted for over the years.

The claim made by M&S has been the subject of much litigation since it was made, and the most recent concerns the question of 'unjust enrichment'. The UK legislation states that where a person has paid an amount of VAT to Customs which was not due to them, Customs has to repay the amount to him. However, the VAT does not have to be repaid if Customs can prove that to do so would unjustly enrich the claimant. Broadly, unjust enrichment arises where, by meeting a claimant's VAT claim, he would be put in a better economic position than if he had not mistakenly accounted for the VAT. In other words, the claimant would receive a windfall. A further complication to the issue is that, until the law was changed in 2005, repayment traders were not caught by the unjust enrichment rules whereas payment traders were.

Customs tried to invoke the unjust enrichment defence in the M&S case, arguing that only 10% of the overpaid VAT should be refunded to M&S. This was on the grounds that the remaining 90% would have been passed onto M&S customers by way of an increase in the price of the teacakes.

What has the Advocate General said?

In coming to his Opinion in the M&S case, the Advocate General confirmed several important principles:

• a trader is entitled to insist on the correct application of zero-rating, where the tax authority takes a different view on the liability of a supply;
• in principle, EU community law confers a right on the trader to obtain a refund of VAT wrongly charged;
• it is contrary to the principle of equal treatment for the defence of unjust enrichment to apply only in respect of repayment traders; and
• the national courts must guarantee the full effect of EU community law by disapplying a domestic provision that is contrary to the principle of equal treatment (ie by using the grounds of unjust enrichment to refuse refunds to payment traders but not to repayment traders).

So what happens now?

If the ECJ ratifies the Advocate General's opinion, the matter will come back to the House of Lords and M&S should receive its refund. However although the case concerned M&S, the outcome could affect many other VAT registered businesses.

Gary Woods, a Senior VAT manager at Grant Thornton says: "Although this is only the Advocate General's Opinion and is subject to confirmation by the ECJ, the view expressed is quite clear. This case takes on a greater significance when considered in the context of the time limits that apply to claims, which was recently considered in separate litigation in the House of Lords. The decision in that case, which may be released this month, may further extend the scope for claims."

"Businesses that have had claims denied on the grounds of unjust enrichment prior to the change in the law in May 2005, or who have not submitted claims because of the current time limits, would be wise to review their position urgently with their tax adviser."

Grant Thornton UK LLP will be happy to provide assistance to anyone who thinks they may be affected. Please click here to contact us for further informati