Marks & Spencer has won a landmark VAT battle about whether a chocolate-covered teacake should be treated as a biscuit or a cake.

The retailer is in line for a£3.5m rebate after overpaying VAT for more than 20 years because the sweet snack had been wrongly classified by HM Revenue & Customs (HMRC) as a chocolate biscuit, attracting a 15 per cent standard VAT rate.

But HMRC yesterday gave up its fight to make a smaller payment, potentially opening the door to another£100m in similar claims.
Most food is VAT-free, with exceptions including chocolate-covered biscuits. In 2004 HMRC admitted chocolate-covered teacakes had been wrongly classified as biscuits but M&S was only offered£350,000 for overpayment, prompting the long-running legal dispute.

HMRC had argued that most of the VAT charge had been passed on to M&S customers so a higher payout would be “unjust enrichment”.