The Teacake Saga

No sooner had I finished writing my recent posting about whether or not a Pringle was a crisp, I picked up Small Business Tax and Finance September 2008 in which a lead article focused on the teacake saga involving Marks and Spencer.

For those of you who are following this story with interest, (is there anyone at all that sad), this is a dispute that has taken 14 years to be resolved.

The fight started in 1994 when M&S made a claim for overpaid VAT on chocolate teacakes. Up to that point, HMRC had viewed these as standard–rated biscuits and M&S had accounted for VAT on them from 1973 to 1994. In September 1994, the then HM Customs and Excise acknowledged their error and indeed that chocolate teacakes were indeed cakes not biscuits, and accordingly were zero rated.

In February 1995, M&S submitted a claim for overpaid VAT to the Commissioners for £3.5m. That claim was accepted only to the extent of 10% of that amount (£350,000) since the Commissioners took the view that M&S had passed on to its customers 90% of the VAT paid on the teacakes. The authorities also applied the then newly introduced 3 year capping provisions and said they were not obliged to repay any sum which had been paid to them more than 3 years prior to the submission of the claim for repayment. The amount which was finally paid to M&S on 4 April 1997 was only £88,440.

M&S appealed to the VAT and Duties Tribunal which upheld the view taken by the Commissioners and the company then appealed to the High Court which again dismissed the claim. They then took the matter to the Court of Appeal which supported all the prior rulings, but eventually, the matter did reach the European Court of Justice. Whilst in 2002, the ECJ ruled in Marks and Spencer’s favour, they still only supported the 10% limited of £350,000. Marks and Spencer’s again appealed and finally, in December 2007, M&S were successful in recovering the full amount of £3.5m.

I suppose if I was running Marks and Spencer’s, I would also see it as my duty to recover any funds I could in this way, but I have to seriously question the time costs, legal fees and other expenses that must have been involved over 14 years. I’d even go as far to wonder whether the actual costs ultimately were greater than the tax recovered. Surely, there must be an easier and better way to resolve these disputes. Perhaps the legislation is the prime culprit. To create situations where highly trained professionals are at loggerheads over whether something is a biscuit or a cake or a Pringle or a crisp, beggars belief. No doubt greater minds than mine have been involved in drafting the legislation that created this situation, but I am yet to be convinced.

The problem is also that these situations never come to light until they find their way into Court and by then it is too late to change the legislation. Perhaps an enlightened Government would simply hold up its hands, realise the drafting of the legislation was simply stupid and repay the money. Instead, our Courts and the legal professionals who operate through them, representing both sides, get tied up in such mind numbingly banal arguments.

This really does take the biscuit!