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Marks and Spencer plc v Customs and Excise [2009] UKHL 8

VAT – tea cakes, unjust enrichment

Introduction

This case is a long-running saga which was described by one of the Law Lords as “the long drawn appeal”.

While the issue of whether a chocolate covered teacake was a biscuit (standard rated) or a cake (zero rated) had been resolved back in the mid-1990's. This tricky issue made its debut recently on Coronation Street when the results were discussed by Norris’ friend Mary!

The issue in this case related to repayment of VAT overpaid and whether the UK Revenue could invoke the principle of unjust enrichment to disallow most of the repayment. The case had been referred to the European Court of Justice in 2005. The ECJ gave its judgment in April 2008.

The Facts

Marks & Spencer's claim against the Customs and Excise was that chocolate-covered teacakes were between 1973 and 1994 incorrectly treated by the C & E as subject to standard-rate VAT as chocolate-covered biscuits instead of being zero-rated as chocolate-covered cakes.

From April 1973 to October 1994, the UK Revenue took the view that chocolate-covered teacakes were biscuits not cakes and accordingly they had to be taxed at the standard rate of VAT. By letter of 30 September 1994, the Revenue acknowledged that the teacakes were in fact cakes and subject as such to VAT at the zero rate.

Marks & Spencer thus paid a tax which was not due. On this basis Marks & Spencer submitted a claim for repayment. The claim was accepted only to the extent of 10% of the amount, as the Revenue took the view that Marks & Spencer had passed on 90% of the VAT paid by it to its customers and so invoked the defence of unjust enrichment.

The taxpayer contended that it had a right of repayment not only under national legislation but also as a matter of Community law and that it was contrary to Community law for that right to be restricted by the defence of unjust enrichment.

The issue was referred to the ECJ.

The Issue

Whether Marks and Spencer had a right to repayment not only under national law but also as a matter of community law; and whether it was contrary to principles of community law for that right to be restricted by the defence of unjust enrichment.

The Decision

The following questions were referred to the ECJ:

  1. Where, under art 28(2)(a) of the Sixth . . . directive (both before and after its amendment in 1992 by Directive 92/77), a member state has maintained in its domestic VAT legislation an exemption with refund of input tax in respect of certain specified supplies, does a trader making such supplies have a directly enforceable Community-law right to be taxed at a zero rate?
  2. If the answer to Question 1 is in the negative, where, under art 28(2)(a) of the Sixth . . . Directive (both before and after its amendment in 1992 by Directive 92/77), a member state has maintained in its domestic VAT legislation an exemption with refund of input tax in respect of certain specified supplies but has mistakenly interpreted its domestic legislation with the consequence that certain supplies benefiting from exemption with refund of input tax under its domestic legislation have been subject to tax at the standard rate, do the general principles of Community law, including fiscal neutrality, apply so as to give a trader who made such supplies a right to recover the sums mistakenly charged in respect of them?
  3. If the answer to Question 1 or Question 2 is in the affirmative, do the Community-law principles of equal treatment and fiscal neutrality in principle apply with the result that they would be infringed if the trader in question is not repaid the entire amount mistakenly charged on the supplies made by him in circumstances where:
    1. the trader would be unjustly enriched by repayment to him of the entire amount;
    2. domestic legislation provides that overpaid tax cannot be repaid to the extent that repayment would lead to unjust enrichment of the trader; but
    3. domestic legislation makes no provision similar to that referred to in (ii) in the case of claims by “repayment traders”? (A “repayment trader” is a taxable person who, in a given prescribed accounting period, makes no payment of VAT to the competent national authorities but receives a payment from them because, in that period, the amount of VAT that he is entitled to deduct exceeds the amount of VAT due in respect of supplies made by him.)
  4. Is the answer to Question 3 affected by whether or not there is evidence that the difference of treatment between traders making claims for the repayment of overpaid output tax and traders making claims for additional amounts by way of input tax deduction (resulting from the over-declaration of output tax) has, or has not, caused any financial loss or disadvantage to the former and, if so, how?
  5. If, in the situation described in Question 3, the Community-law principles of equal treatment and fiscal neutrality apply and would otherwise be infringed, does Community law require or permit a court to remedy the difference of treatment by upholding a trader's claim to a repayment of overpaid tax in such a way as to enrich him unjustly or require or permit a court to grant some other remedy (and, if so, which)?”

The ECJ held that although the principles of equal treatment and fiscal neutrality applied in principle in this case, an infringement did not occur merely because of a refusal to make repayment based on the unjust enrichment. However, the principle of fiscal neutrality did preclude the concept of unjust enrichment from being applied only to taxable persons in a payment situation and not to taxable persons in a repayment situation. It was necessary for the National Court to decide if this was the position in this case.

In addition, the principle of equal treatment applied in a situation where traders who sought to obtain repayment from the tax authorities found their claims were treated differently. Again it was for the National Court to decide if this was the position in this case.

It was noted that two issues were to be decided by the National Court. C & E decided (after 13 years of litigation) that they did not wish to pursue the issues further.

On this basis, the House of Lords allowed the appeal that Marks & Spencer had a right to repayment under Community law.

See Selected Judgments for the full judgment. Alternatively, the judgment is available online at http://www.bailii.org/uk/cases/UKHL/2009/8.html.