Tax ruling could benefit processors

Processors could benefit from the House of Lords ruling allowing Marks & Spencer (M&S) to recoup £3.5M of tax on tea cakes, according to chartered accountancy firm Reeves & Neylan.

Greg Mayne, head of indirect tax at the company, said other retailers in a similar position could make claims, but so could manufacturers that were mistakenly paying tax on ingredients. Some ingredients used for making foodstuffs were zero-rated for tax purposes, he said.
“They could be missing out on tens of thousands of pounds,” said Mayne. “Make sure you have evidence from Her Majesty’s Revenue & Customs (HMRC) that a product being used for foodstuffs is zero rated.”
After May 1 1997, HMRC introduced a three-year cap on all efforts to reclaim input VAT, which processors sometimes pay for ingredients and retailers pay for finished products. Input VAT paid before that date is not capped for reclaim purposes. Output VAT is separate and is added to the price of goods by retailers and paid by shoppers.
HMRC told M&S that the teacakes it sold were standard-rated for VAT purposes because they were classed as chocolate biscuits. It revised the decision, accepting that they were chocolate cakes and therefore zero rated for tax purposes, in September 1994.
However, it then ruled that M&S could not reclaim most of the VAT because most of it would have been paid by shoppers, not the retailer so reimbursement would be classed as “unjust enrichment”
Finally, the House of Lords last month backed a ruling by the European Court of Justice that M&S was entitled to the cash after all.