Hidden VAT threat in plate of teacakes

It was only a matter of time before Customs & Excise was challenged over its decision to impose a three-year cap on VAT refunds. That it has been challenged by one of the country’s most prestigious and successful public companies gives the contest added bite.

Last week, Marks & Spencer began what could be a long and bitter battle with Customs to wrest back VAT payments made over 21 years on the sale of chocolate teacakes and children’s clothes.

If successful, several other big names are likely to want their money back. In the end, the Treasury could be forced to pay back hundreds of millions of pounds.

Stage one in the battle was a six-day VAT tribunal hearing in front of tribunal president Stephen Oliver QC, as reported in last week’s Accountancy Age (‘News’, page 3). Oliver had already ruled that M&S was entitled to a total refund on VAT paid on children’s clothes, but only 10% of its claim related to teacakes.

The disappointment felt by M&S executives following Oliver’s ruling at receiving such a small percentage for the teacakes paled by comparison with their frustration and anger when the three-year cap was slapped on their total winnings.

Deloitte & Touche, representing M&S, said at the tribunal that Customs had robbed the company of rights it acquired under European law when the three-year cap was inserted in the 1997 Finance Act.

These rights were in place, the firm argued, when the claims were made, and the Finance Act can’t take them away. According to Deloittes, the effect of a retroactive limitation period is to discriminate between payment traders and repayment traders, which can be held to have offended European law.

At the forefront of the attack were renowned tax lawyer, professor Michel Waelbreck, and in-house barrister Andrew Young. They went on to say the ruling made it impossible to make a successful claim, which M&S could say it achieved, if only partially, because it would be limited to a three-year clawback.

The same would be true, they said, where the taxpayer relied on a decision of the European Court of Justice that was not limited by time.

The battle started when M&S discovered it was selling teacakes and children’s socks at the standard rate when they should have been zero-rated. Customs does not dispute that M&S had mistakenly selected the liability of the products and paid too much VAT.

The dispute centres on how much should be repaid. Customs successfully argued in a tribunal last year that its refund should be limited to 10% for the teacakes, on the basis that M&S customers had paid 90% of the VAT and satisfactory methods of compensating the customers couldn’t be found.

Customs said the company could sing for the VAT paid on children’s socks because customers had paid the entire burden. The theory was that, in the case of teacakes M&S had been able to pass on an increased price to customers – equal to 90% – and once the VAT was stripped out the price would have assumed a price that reflected normal cake retail margins.

Customs said if the VAT had truly made selling children’s socks uneconomical, M&S would have swapped them for something else. But the tribunal rejected this argument after hearing that each store must retain a full range of clothes or customers will go elsewhere. M&S was therefore absorbing the VAT unfairly.

It will need to wait for at least two months before Oliver makes his decision. Whichever side loses, indications are appeals will be lodged immediately. And however Customs plays down the significance of this attack on the three-year cap, behind the scenes there is some apprehension.


1994: Marks & Spencer discovers it was selling chocolate tea cakes and children’s socks at wrong VAT rate for 21 years. Products sold at standard rate should have been zero-rated. Customs agrees with the assessment of VAT liabilities but contests a tax refund claiming customers had paid the VAT, not the company.

1997: VAT tribunal rules in M&S’ favour for children’s clothes, but agrees only 10% repayment for the teacakes. Customs slaps three-year rule on refund.

1998: M&S appeals against three-year ruling, claiming it breaches EU rights.

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