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M&S Tax Victory Takes The Biscuit

London, UK (06/02/2009)

LONDON (Management Today) M&S has finally won its 13-year battle over the VAT status of the chocolate-covered teacake.

In winning what has become an epic struggle, if a rather obscure one, the retailer will probably feel it has gotten its just desserts. In 1995 M&S claimed a repayment of £3.5m for VAT it had paid between 1973 and 1994 on sales of the teacakes - which the taxman had wrongly classified as biscuits. The Commissioners of Customs and Excise then recognised the mistake, but refused to refund 90% of the tax, saying the retailer would profit unduly as customers had already paid VAT on the products. Now three Law Lords have confirmed that M&S is entitled to a full refund, upholding last year's decision by the European Court of Justice (ECJ).

Anyone who's ever entered the great Jaffa Cake debate will know that the world of biscuits and cakes is one that, once unwrapped, contains a whole host of potentially troublesome complications. The general argument as to what constitutes which is usually won by pointing out that cakes go hard when stale, while biscuits go soft (thus confirming the Jaffa is indeed a cake, even if it does offer the consumer the convenience and form-factor of a biscuit).

Indeed, McVities won a famous victory more than 10 years ago when it successfully argued that a Jaffa Cake was indeed a cake, rather than a biscuit, thus making it exempt from VAT. Under UK tax rules, manufacturers don't pay VAT on traditional bakery products like bread, cakes and flapjacks, but do on cereal bars, shortbread and partly-coated or wholly-coated biscuits. No tax is paid on bourbons, or other biscuits with a filling between two halves, as opposed an outer coating. The confusion over the teacake comes from the fact it is both covered and contains a biscuit filling. Have you had enough yet? Or would you like another slice of recession talk?

In our humble opinion, the teacake is definitely far less of a cake than your classic chocolate or Eccles numbers. That said, you'd have to be soft in the head to try to claim the teacake as a biscuit. It winds up as some kind of bis-cake hybrid. Either way, the M&S board can sit back and wash away 13 years of fierce corporate struggle with a nice cuppa, and a piece of cake.

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