Taking the biscuit

Inside Politics – The Policy Exchange newsletter (London), 24 December 2007

Take a biscuit, put a layer of marshmallow on top and cover the whole thing in chocolate – what do you call that? The answer: this is not just a biscuit, this is an M&S biscuit. At least that was what HM Treasury thought. To Marks & Spencer, however, these chocolaty creations were something very different. The retailer insisted that they were in fact teacakes.

The lawyers among us will realise that behind this semantic differentiation lies an important distinction under British tax law. Cakes are VAT free, whereas biscuits are not. Consequently the tax authorities kept charging M&S VAT on these biscuits for many years – between 1973 and 1995, to be precise. Over this time, a total of £3.5m had been paid.

But then, after more than two decades, it occurred to the Treasury that they had committed a serious mistake. Cakes, when you store them, go hard whereas biscuits past their due date go soft. And as M&S teacakes apparently hardened they qualified for the VAT exempt cake status – and M&S has since tried to recoup the wrongly paid taxes. Today, after a long legal battle, the European court of justice’s advocate general said that the Treasury should be required to pay back the money to the company in full. It is expected, that the European court will follow her recommendation.

It would be easy to just find the whole issue ridiculous, but actually it is symptom of many things that are wrong with our (tax) law. First, it is plainly incomprehensible that there should be different tax rates for, arguably, very similar products. British tax law has become Byzantine in an attempt to be fair to all, but the result is neither just nor efficient. Second, a case about a wrongly paid tax should never take more than a decade to decide. Third, one may wonder why a legal dispute between a British taxpayer and HM Treasury has to go to a European court that will then pass on its recommendation to the House of Lords for a final decision. And fourth, all the complexities and legal proceedings would by now have probably cost more than the taxed amount in dispute.

Tax simplification is certainly not a piece of cake, and therefore it is neither VAT-free nor painless. But in order to re-establish legal certainty and reduce the amount of red-tape involved, it is worth every effort. Policy Exchange is planning to conduct more research on this subject in the coming year.

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