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MARKS AND SPENCER STRUGGLING TO HAVE ITS CAKE AND EAT IT
[09-08-2006]
Food and clothing giant Marks & Spencer (M&S) is fighting back over tax charged on its chocolate-covered teacakes.
M&S is trying to claim back what it claims is wrongly charged VAT arguing that the teacakes, which had originally been classified as biscuits and so subject to VAT, are in fact cakes and so exempt from the tax.
Stephen Goldstraw, corporate tax partner at Manches, explains: "It is now well established that a chocolate teacake is a chocolate cake and therefore zero-rated under UK law, not a chocolate biscuit, which would be subject to VAT.
"M&S was forced to charge VAT on teacakes for years and is owed a small fortune as a result. However, Customs says it can only have ten per cent of it because 90 per cent of the VAT cost was passed on to customers.
"The question is whether Customs' argument, which is valid under UK law, is valid under EU law. The issue is complicated by the fact that teacakes do not have to be zero-rated under EU law."
He continued: "The chocolate covering test is itself a minefield of complexity. For instance, a chocolate chip cookie is zero-rated but a chocolate digestive is not - the latter is covered in chocolate, the former is not. A gingerbread man decorated with chocolate is subject to VAT, but not if he only has chocolate eyes."
The House of Lords passed the case to the European court last year, but followed it up with several points for judgement last month. One of these points was whether M&S would be "unjustly enriched" by the £3.5 million tax rebate.
Marc Welby, the director of VAT at tax adviser Chiltern, told the Independent: "It is a horrendously complex issue and the costs must be significant, running into seven figures."
The case is significant in that, should M&S win it could open the floodgates for a wealth of VAT claims against the Revenue.
 © Adfero Ltd
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