Talking with the Taxman about Teacakes

By skepticlawyer


Turns out that HM Revenue and Customs have been caught out by the complexity of their own legislation. The teacake – a popular British tooth-wrecker – has been wrongly taxed for the last 20 years. Even worse, it’s the teacake sold by British institution, Marks & Spencer, that’s been on the receiving end:

The UK Treasury is facing a £3.5m bill, because of VAT wrongly imposed on a Marks and Spencer teacake, the European Court of Justice (ECJ) has ruled.

Customers paid VAT for 20 years before the authorities accepted the product was a cake, which does not command VAT.

The UK argued that paying back the total sum would ‘unjustly enrich’ M&S as customers had paid the money.

The ECJ ruled that, in principle, VAT had to be repaid in full, but left the final decision to the British courts.

The dispute not only turned on whether the marshmallow filled sweet was a ‘biscuit’ or a ‘cake’, but also on the type of store involved. M&S was viewed differently from other chains:

Under UK tax rules, most traditional bakery products such as bread, cakes, flapjacks and Jaffa Cakes are free of VAT, but the tax is payable on cereal bars, shortbread and partly-coated or wholly-coated biscuits.

The complexity of the legal battle surrounds the difference made by the tax authorities between companies classed until 2005 as repayment and payment traders.

While M&S was classed as a payment trader which owed VAT to the government at the end of a financial quarter, it argues that the main supermarkets, which were owed VAT by the authorities, were treated differently on the issue of chocolate teacakes.

It complains that HM Revenue and Customs handed supermarkets back the VAT wrongly paid by customers on chocolate teacakes, while refusing to do the same for Marks & Spencer.

Silly and pointless regulations, parts 3 and 17…


  1. FDB
    Posted April 11, 2008 at 1:25 pm | Permalink

    So that’s a teacake. WTF?

    It contains biscuit, meringue and chocolate. Where’s the cake?

    Tax it, I say! (but then I would wouldn’t I?)

  2. JC.
    Posted April 11, 2008 at 1:33 pm | Permalink

    Who would eat that crap? Brits who else.

    FDB is right, it isn’t taxed enough.

    It complains that HM Revenue and Customs handed supermarkets back the VAT wrongly paid by customers on chocolate teacakes, while refusing to do the same for Marks & Spencer.

    Great, so her majesty’s government decides who pays and who doesn’t pay the tax now? I wish the same penailties applied for evasion and avoidance in reverse.

  3. Nanuestalker
    Posted April 11, 2008 at 3:47 pm | Permalink

    What the Taxman wants his cake and to eat it too?

  4. amortiser
    Posted April 11, 2008 at 5:01 pm | Permalink

    A bigger blue was made here some years ago with the excise that the States charged on beer and petrol. A publican mounted a challenge and won his case in the High Court. State governments had imposed a tax on citizens without constitutional authority. In effect they were no better than bushrangers. The funds illegally collected amounted to billions of dollars.

    No sooner had the decision come down than there were multimillion dollar writs lodged with the courts for the return of the funds illegally collected from publicans in particular. The oil companies would not have been far behind.

    Peter Costello mounted his white charger and announced that any successful claims would be subject to retrospective legislation by the Commonwealth to preserve the State’s illgotten gains. The writs were withdrawn on the basis of that threat.

    There could well have been a case for contempt of court against Costello for that effort. I’m sure it is an offence to threaten a litigant who may take action in a court. But I suppose there is one rule from some and different rules for others.

    This action was the basis for the so called “fuel subsidy” to Queensland motorists which ALP governments refer to up here. As the National Party government never imposed the state tax in Queensland the now federally imposed tax is returned as a rebate. The ALP likes to give the impression that it is a handout from them to its grateful citizens.

  5. Posted April 11, 2008 at 5:04 pm | Permalink

    Don’t laugh at the Brits, under our GST the fruiters are supposed to ask whether you plan to take the apple away or eat it in the shop. One way they have to charge GST, the other they don’t.

  6. Posted April 11, 2008 at 9:15 pm | Permalink

    I know, Rafe. The level of regulatory silliness is just ridiculous. Of course, the customers have already paid the VAT, so if M&S does get the dosh, one wonders if they’ll share it around…

  7. rog
    Posted April 11, 2008 at 10:05 pm | Permalink

    Rafe, the issue is whether it is to be used as food or forms part of a process – few if any go to a shop, buy fruit and then work it into a manufactured good for resale. Surely commonsense prevails, it used to.

  8. rog
    Posted April 11, 2008 at 10:10 pm | Permalink

    The thing with this sort of tax micro management thing is that anybody with half a brain, or less ( I dont want to unnecessarily exclude the Larva crowd) can walk around it – it is easily corrupted as are the proponents.

  9. Posted April 12, 2008 at 5:49 am | Permalink

    This would be one of those occasions where the storm is beside the teacup rather than in it.

    The argument in Australia for exempting food from GST was all about food being an essential and how such a tax on food would hurt the poor. And yet the 17% clothing tariff tax (extra to GST) does not seem to even raise an eyebrow. I’d suggest we impose GST on food and compensate everybody by abolishing the clothing tax.

  10. Posted April 12, 2008 at 1:58 pm | Permalink

    Ken L over at Surfdom is having a whinge about registering here… and then complains about the restrictions on his ‘liberty’.

    A clear case of ‘what’s mine is mine, and what’s yours is mine, too’.

  11. Graham Bell
    Posted April 13, 2008 at 12:00 am | Permalink

    Amortiser [4]:

    ” ….announced that any successful claims would be subject to retrospective legislation by the Commonwealth to preserve the State’s illgotten gains.”

    You wouldn’t expect anything else in Soviet Australia with its notorious “retrospective legislation, would you?

    Rog [7]:

    No. Commonsense cannot be allowed to prevail at all …. otherwise people would be sticking all those pretty sets of Australia internal postage stamps on their letters to stamp-collecting friends overseas. L=O=L

  12. Rococo Liberal
    Posted April 14, 2008 at 10:32 am | Permalink


    As Catallaxy’s resident Tax expert, I can tell you a lot of Australian versions of this story. I spent 5 years of my life making a great deal of money proving to the Federal Court that all but the very biggest safes were taxable at the concessional rate applicable to furniture. A nice judge agreed, much to the chagrin of the Commissioner of TAxation, who got the Government to change the law. Then we got around that …

  13. Tillman
    Posted April 14, 2008 at 10:38 am | Permalink

    As Catallaxy’s resident Tax expert

    Even a hawk is an eagle amongst crows, Retardo.

  14. Posted April 14, 2008 at 11:15 am | Permalink

    That’s enough, Tillman.

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