The European Court of Justice (ECJ) has today ruled in favour of Marks & Spencer (M&S) concluding a long running litigation battle concerning the overpayment of VAT on chocolate teacakes.

Tony McClenaghan, head of indirect tax at Deloitte, which acted for M&S, said: “This judgment entitles M&S to claim back £3.5 million in overpaid VAT, bringing to an end an epic dispute after 12 years and two trips to the ECJ. This is a sweet victory for M&S, for whom this was as much a matter of principle as about recovering the money.”

While the UK tax authorities accepted that the high street retailer had wrongly overpaid tax on chocolate teacakes over a number of years, HM Revenue & Customs (HMRC) argued that repaying the full amount of the tax would ‘unjustly enrich’ M&S because about 90% of the VAT had been passed on to customers.

Marks & Spencer argued that the defence of unjust enrichment was applied to its valid claim for wrongly paid tax but the same defence was not applied to block comparable claims made by its competitors.  In fact, M&S’s competitors got refunded without question, contravening the European law principles of equal treatment and fiscal neutrality.

Tony McClenaghan added: “Commonsense has prevailed. It is unreasonable for different retailers to be treated differently in relation to similar transactions. The fact that the UK authorities changed the law in 2005 suggested that comparable situations had previously been treated differently.”

The ECJ confirmed that under the principle of fiscal neutrality, the defence of unjust enrichment cannot be invoked in against a tax payer where it offends the principle of equal treatment, entitling Marks & Spencer to a full refund of the over paid tax.

The point of contention in the case was that HMRC made a distinction when applying unjust enrichment to so-called “payment traders” and not to “repayment traders”. Payment traders are those whose output tax exceeded their input tax making them treasury debtors. Repayment traders are those whose input tax exceeded their output tax making them treasury creditors. 

Marks & Spencer was treated as a payment trader and when it sought to recover unlawfully levied amounts of tax its claim was refused on the basis of unjust enrichment.  However, in the case of repayment traders no such refusal was made and most of Marks & Spencer’s competitors who happened to be treated as repayment traders got their refunds paid.  In 2005, the UK Government changed the law to align the unjust enrichment law.

The ECJ’s ruling stated that the distinction between so-called repayment and payment traders was “not objectively justified” given that a taxable person could find himself in any of those situations given different trading patterns from one accounting period to another;

Tony McClenaghan concluded: “This ECJ ruling will also apply to comparable situations where the application of unjust enrichment prior to 2005 has been applied to claims to block repayments. Any UK businesses which have previously had claims blocked on the grounds of unjust enrichment, should review their circumstances and consider filing a claim with HMRC to get their money back.”

Notes to editors:

Background and context to case
In 1994, HMRC originally refused repayment of M&S’s claim for overpaid output VAT on the grounds that repayment would unjustly enrich M&S because about 90% of the VAT had been passed on to customers. Furthermore, as the claim had not been repaid by 18 July 1996, HMRC also argued the VAT was blocked under the capping legislation then introduced.

M&S appealed up through the UK courts to the Court of Appeal and at each stage the courts found for HMRC on both the capping and unjust enrichment issues. The contentious matter was around the capping and following a referral to the ECJ, HMRC conceded the capping point but maintained their stance on unjust enrichment. The Court of Appeal upheld HMRC’s view and M&S appealed the matter to the House of Lords (“HoL”).

The HoL found for HMRC but in view of comments in the earlier ECJ reference, it reluctantly made a further reference to the ECJ on the unjust enrichment point.

In December 2007, the Advocate General handed down his opinion that under the principle of fiscal neutrality, the fact that Marks & Spencer has been enriched cannot be invoked in circumstances where it offends the principle of equal treatment.  In such circumstances the AG opined that Marks & Spencer was entitled to a full refund of the over paid tax.
The ECJ decision invalidates the application of unjust enrichment prior to 2005 where this has been applied to comparable claims to block repayments. 

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