M&S's million-pound teacake tax row takes the biscuit

European Court of Justice set to hear next stage of 12-year bun fight between Revenue and retailer over £3.5m in VAT

The legal dispute brewing over Marks & Spencer teacakes is reaching boiling point as the £3.5m tax row has now been served up before the European Court of Justice.

But the costs of the 12-year bun fight between the high street retailer and the UK tax authorities are in danger of swallowing the money M&S is trying to reclaim.

M&S is fighting to claim back VAT wrongly charged on its chocolate-covered teacakes. The cakes had originally been classified as biscuits, which are subject to VAT. Like most food, cakes are exempt from the tax.

The House of Lords, having reluctantly said last year that the matter should go before the European court, sent a set of points to it for judgement last month. These include whether M&S would be "unjustly enriched" if the taxman were to repay the full £3.5m.

The Revenue has withheld 90 per cent of the amount, arguing that M&S had already passed on the VAT to its customers. M&S wants the money repaid in full. Although neither side would confirm the costs of fighting the case, experts believe it could be several million pounds.

Marc Welby, the director of VAT at tax adviser Chiltern, said: "It is a horrendously complex issue and the costs must be significant, running into seven figures."

Although the costs could outweigh the tax at stake, wider principles made it worthwhile pursuing the case, said Anbreen Khan, an indirect tax specialist at Deloitte, the accountancy firm acting for M&S.

Mr Welby said that were M&S to win its case it could open the floodgates for other VAT claims against the Revenue.

M&S said it would not comment until the outcome of the case was known.