Page last updated at 16:19 GMT, Wednesday, 4 February 2009

M&S wins tax battle over teacake

A chocolate teacake
Chocolate teacakes were wrongly classed as a biscuit for two decades

Marks and Spencer (M&S) has won a 13-year battle over the UK tax status of its chocolate-covered teacake.

M&S took action against the taxman, who charged 3.5m VAT on teacakes between 1973 and 1994, after having them wrongly classified as biscuits.

UK tax officials recognised the teacakes had been wrongly classed, but refused to pay back all the wrongly charged VAT that M&S had paid.

Three Law Lords have now reaffirmed M&S is entitled to a full refund.

They upheld last year's decision by the European Court of Justice (ECJ).

Under UK tax rules, most traditional bakery products such as bread, cakes and flapjacks are free of VAT, but the tax is payable on cereal bars, shortbread and partly-coated or wholly-coated biscuits.

In 1995 Marks & Spencer claimed a repayment of 3.5m for the VAT payments it had made, but the Commissioners of Customs and Excise refused to refund 90% of the tax.

It argued that paying back the total sum would "unjustly enrich" M&S as customers had paid the VAT on the teacakes, and it offered to refund 88,440.

In April 2008 the ECJ said that Marks and Spencer was entitled to a full refund, and on Wednesday the conclusion was not challenged in the Lords.

Lord Walker said the ECJ ruling left open some matters for the UK courts but that the customs commissioners had decided not to pursue them.

"After 13 years of litigation, we are pleased that this matter is now finally concluded," the company said in a statement.


How various products are classified by HM Revenue and Customs

Zero rated [no VAT] Standard rated [15% VAT]
Chocolate chip biscuits where the chips are either included in the dough or pressed into the surface before baking All wholly or partly coated biscuits including biscuits decorated in a pattern with chocolate or some similar product
Jaffa Cakes Gingerbread men decorated with chocolate unless this amounts to no more than a couple of dots for eyes
Bourbon and other biscuits where the chocolate or similar product forms a sandwich layer between two biscuit halves and is not continued on to the outer surface Chocolate shortbread
Marshmallow teacakes (with a crumb, biscuit or cake base topped with a dome of marshmallow coated in either chocolate, sugar strands or coconut) "Snowballs" without such a base are classed as confectionery
Caramel or "millionaire's" shortcake consisting of a base of shortbread topped with a layer or caramel and (usually) chocolate or carob Shortbread partly or wholly chocolate-covered
Flapjacks Cereal, muesli and similar bars with honey or other added sweetening matter

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