The Hindu Business Line : Chocolate teacakes or `unjust enrichment'

"Molly, my sister and I fell out, and what do you think it was all about?" Thus begins a nursery rhyme with a question. The answer is simple: "She loved coffee and I loved tea, and that was the reason we couldn't agree."

Marks & Spencer plc and the UK taxman fell out, and what do you think it was all about? Chocolate teacakes said M&S, `unjust enrichment' said the taxman, and that was the reason they couldn't agree.

"The problems concerning the VAT (value-added tax) treatment of chocolate biscuits and cakes are by now something of a legend. I remember them from my student days, and so I was surprised to note this week that problems are still rumbling on and on and on," writes Nichola Ross Martin, in an article Storm in a teacake - the never-ending saga of VAT and chocolate, dated July 17 on AccountingWEB.

"For many years, starting with the introduction of VAT in 1973, the Commissioners of Customs and Excise took the view that M&S teacakes, which are covered with chocolate, were biscuits and therefore standard-rated," narrates the text of an earlier judgment of House of Lords.

The supply of food is, in general, zero-rated for VAT, one learns. "But there are exceptions. One exception is confectionery. And there is an exception to that exception: cakes or biscuits are in general also zero-rated. There is however an exception to that exception to the exception, namely, biscuits wholly or partly covered with chocolate. They are standard-rated."

As tricky as a recipe! Perhaps, that's why M&S got mixed up and kept accounting for VAT, for over two decades. Then, in September 1994, M&S admitted that it had been wrong. Teacakes were actually cakes and should have been zero-rated, said the company. It, therefore, claimed "repayment of all the VAT for which they had wrongly accounted over the years, totalling £3.5 million."

What did the taxman say? `Unjust enrichment'. Not a comment about the nutritional value of teacakes but the characteristic `passing on defence'. Accordingly, the taxman argued that the customers would already have paid the original VAT.

"They said that M&S had passed on 90 per cent of the VAT to their customers. After hearing expert evidence about the market for teacakes, the VAT Tribunal accepted this submission and held that M&S were entitled to only 10 per cent of their claim."

Over the years, the teacake litigation has taken M&S and the taxman through the Court of Appeal and the European Court of Justice too.

The latest decision of the House of Lords considers the interaction of UK VAT and EU law and seeks answers to questions such as: "Did community law require or permit the remedy granted by the national court to depend on proof of financial loss, and on the absence of unjust enrichment?"

A storm that doesn't promise to die down soon. For, as Pandarus philosophises in Troilus and Cressida, "He that will have a cake out of the wheat must needs tarry the grinding."

http://AccountSpeak.blogspot.com

D. Murali

More Stories on : Accountancy | Account Speak | Courts/Legal Issues

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The sugar policy muddle

Need for speed on the reform road

Fear of prosecution

Move on CFO

High levels of derivative exposure

Chocolate teacakes or `unjust enrichment'

Smoke 'n mirrors

These Special Uneconomic Zones

The man who made Hitler wait

"Judicial deal"

Save oil