Marks and Spencer plc v. Her Majesty's Commissioners of Customs and Excise

This appeal concerned whether Marks & Spencer had a directly enforceable Community law right to have sales of its chocolate-covered teacakes zero-rated for VAT and, if so, whether that right could be curtailed by the domestic unjust enrichment / passing-on defence (VATA 1994 section 80(3)) or by retrospective limitation introduced by the Finance Act 1997 (section 47). The central legal issues were (i) whether Article 28(2)(a) of the Sixth VAT Directive gave rise to an enforceable individual right where a Member State retained national zero-rating measures, (ii) whether administrative misapplication of correctly transposed national law can give rise to directly enforceable rights (the Becker conditions and related ECJ authorities), and (iii) whether Community law precludes national rules which deny repayment of unlawfully collected VAT when the trader has passed the burden on to customers.

The House concluded there remained real doubt on points of Community law, in particular whether the retention and application of domestic zero-rating under Article 28(2)(a) could give rise to an enforceable right and how the principles of effectiveness, legitimate expectations and non-discrimination apply where national measures pre‑dating the Directive are retained or misapplied. For these reasons the House referred questions to the Court of Justice of the European Communities for clarification.

Background and parties:

• Parties: Appellant Marks & Spencer Plc, large retailer with an own-brand chocolate-covered teacake product; Respondent Commissioners of Customs & Excise (Revenue & Customs).
• Facts: From 1973 to 1994 the Commissioners regarded and taxed M & S teacakes as chocolate-coated biscuits (standard-rated). In 1994 they accepted teacakes were cakes and should have been zero-rated. M & S claimed repayment of VAT overpaid since 1973 (about £3.5m).

Procedural history:

• M & S claimed repayment under VATA 1994 section 80; Commissioners relied on the unjust enrichment / passing-on defence in section 80(3). The VAT & Duties Tribunal found M & S had passed on most of the tax and allowed recovery of only 10% of the claim (reported decisions and appeals followed: Tribunal decisions, High Court (Moses J) [1999] STC 205, first Court of Appeal [2000] STC 16, reference to the ECJ, ECJ judgment [2002] STC 1036, second Court of Appeal [2004] STC 1, and finally this appeal to the House of Lords).
• The litigation also involved related voucher claims which gave rise to a reference to the ECJ and which influenced the scope of the issues considered by the ECJ and the national courts.

Nature of the claim / relief sought:

• M & S sought repayment of overpaid VAT on teacakes, and contended that Community law gave it a directly enforceable right to be zero-rated so that domestic defences (passing-on / unjust enrichment and retrospective limitation) could not be applied to defeat full recovery.

Issues framed by the court:

1. Whether Article 28 of the Sixth Directive (transitional provision permitting Member States to retain zero-rating exemptions) conferred a directly enforceable Community right on M & S not to be charged VAT other than zero-rating on teacakes.
2. Whether administrative misapplication of national law correctly transposing a Directive can give rise to directly enforceable rights (the Becker conditions and subsequent ECJ authority).
3. Whether Community law precludes a national unjust enrichment / passing-on defence or retrospective statutory time‑limit from restricting repayment of unlawfully charged VAT where a directly enforceable right exists, including issues of discrimination between payment and repayment traders and principles of effectiveness and legitimate expectations.

Court’s reasoning and conclusion:

The House analysed (i) the transitional nature of Article 28 and the distinction between EU harmonised rules and national measures retained under Article 28; (ii) ECJ authority (including Idéal Tourisme) suggesting that retention of domestic measures authorised by Article 28 does not amount to incorrect transposition and therefore may not give rise to a directly enforceable right; and (iii) the ECJ’s jurisprudence on effectiveness, passing-on and remedies for unlawfully collected VAT (e.g. BP Supergas, Hans Just, Weber's Wine World, and the ECJ judgment on the vouchers reference). The law was found to be sufficiently uncertain — partly because of divergent views expressed by the Advocate-General, the European Commission's observations, and the ECJ’s own treatment of a broader question than that referred — that the House considered it necessary to refer further questions to the Court of Justice for authoritative guidance on (a) whether Article 28 can give rise to enforceable rights in the circumstances of teacakes, (b) the application of non-discrimination/fiscal neutrality between repayment and payment traders, and (c) whether and how Community law permits national rules conditioning remedies on proof of loss or barring recovery when the claimant has passed on the tax.

The House did not decide the substantive EU law issues but concluded there was real doubt on key points of Community law (notably whether Article 28(2)(a) could give rise to directly enforceable rights in the circumstances and how principles of effectiveness, legitimate expectations and non-discrimination apply). For those reasons the House referred questions to the Court of Justice of the European Communities for preliminary ruling. The House emphasised that, given the uncertainty created by rival submissions and the Advocate-General's opinion, a reference was inescapable.

VAT & Duties Tribunal decisions (including [1997] V&DR; 85 and [1998] V&DR; 235) → High Court (Moses J) [1999] STC 205 (appeals dismissed) → First Court of Appeal [2000] STC 16 (reference to the ECJ) → Court of Justice of the European Communities judgment and opinion (reference dealt with in [2002] STC 1036) → Second Court of Appeal [2004] STC 1 → House of Lords [2005] UKHL 53 (further reference to the ECJ ordered).