Marks and Spencer plc (Appellants) v. Her Majesty's Commissioners of Customs and Excise (Respondents)

A national court of final instance must refer a question of Community law where its resolution is necessary and the answer is not acte clair. It was unclear whether a trader acquired a directly enforceable Community right when a member state, acting under the transitional discretion in article 28 of the Sixth VAT Directive, misapplied its own zero-rating legislation.

Further questions arose as to whether fiscal neutrality prohibited discriminatory application of zero-rating and whether any remedy could be restricted by proof of passing-on or unjust enrichment. Those questions also required determination by the European Court of Justice.

The Commissioners mistakenly treated the appellant’s chocolate-covered teacakes as standard-rated biscuits between 1973 and 1994. After accepting that they were zero-rated cakes, the Commissioners resisted most of a £3.5 million repayment claim under the passing-on defence in section 80(3) of the Value Added Tax Act 1994. The VAT Tribunal found that 90% of the tax had been passed to customers.

The High Court and two differently constituted Courts of Appeal rejected the material teacakes arguments. The second Court of Appeal’s decision was reported at [2004] STC 1. Before the House, the issues were whether Community law conferred an enforceable right to domestic zero-rating, whether fiscal neutrality prohibited discrimination between traders, and whether relief could depend upon financial loss and absence of unjust enrichment.

1. The questions of Community law were referred unanimously to the European Court of Justice. Lord Walker of Gestingthorpe identified three questions concerning enforceable Community rights, fiscal neutrality and the permissible scope of a passing-on or unjust-enrichment defence. Lord Hoffmann agreed that a reference was unavoidable. Lord Nicholls of Birkenhead, Lord Steyn and Lord Scott of Foscote agreed that the questions identified by Lord Walker should be referred.

2. Per Lord Walker, article 28 of the Sixth VAT Directive was a transitional provision outside the harmonised VAT system. It permitted member states to maintain specified pre-existing exemptions and reduced rates. Domestic measures retained under that discretion remained essentially national measures, although they operated within a framework authorised by Community law.

3. Lord Hoffmann considered that the United Kingdom did not transpose the Directive by zero-rating cakes. On that view, misclassification of the teacakes under domestic legislation breached no Community obligation. Article 12(1) concerned the time at which an applicable rate was determined and did not itself confer a right to zero-rating.

4. That conclusion could not, however, be treated as acte clair. The European Commission and Advocate General Geelhoed had previously stated that the Commissioners’ treatment of the teacakes was inconsistent with the Directive. Although the European Court’s earlier judgment in the same litigation did not address teacakes or zero-rating, Lord Walker considered that real doubt remained. As the national court of last resort, the House therefore had no alternative but to refer the issue.

5. The reference was also to address whether the principle of fiscal neutrality required a member state exercising its article 28 discretion to avoid discrimination between different types of trader. Authorities relied upon by the parties gave some support to competing positions, but did not provide a clear answer.

6. The European Court was further to determine whether, if a directly enforceable right existed, Community law required or permitted the national remedy to depend upon proof of financial loss and absence of unjust enrichment. Community law recognised repayment as the consequence of an enforceable Community right and permitted national conditions consistent with effectiveness and equivalence, but the interaction of those principles with the alleged discrimination remained uncertain.

7. The parties were directed to agree draft questions reflecting the House’s opinions. The substantive appeal was not finally determined.

1. House of Lords: The House unanimously ordered a further reference to the European Court of Justice and did not finally determine the substantive appeal: [2005] UKHL 53.

2. Second Court of Appeal: Auld LJ, Chadwick LJ and Newman J concluded that the teacakes claim disclosed no directly enforceable Community right and rejected the alternative passing-on and discrimination arguments: [2004] STC 1.

3. European Court of Justice: On the first Court of Appeal’s reference concerning retrospective limitation, the Court held that national legislation retroactively restricting repayment of VAT collected contrary to directly effective provisions was incompatible with effectiveness and legitimate expectations: [2002] STC 1036.

4. First Court of Appeal: The teacakes passing-on and capping appeals failed. A question concerning the early gift-voucher claim was referred to the European Court of Justice: [2000] STC 16.

5. High Court: Moses J dismissed the appeals, holding that zero-rating of teacakes was a domestic matter and that no Community right to repayment arose: [1999] STC 205.

6. VAT and Duties Tribunal: The Tribunal held that 90% of the overpaid teacake VAT had been passed to customers and limited repayment to £350,000: [1997] V&DR 85. It later dismissed the appeals against application of the retrospective three-year limit: [1998] V&DR 235.