EU court "teacake ruling" may boost VAT refunds

BRUSSELS, April 10 (Reuters) - The European Union's top court ruled on Thursday that EU governments and taxpayers must be treated equally when it comes to reimbursements for wrongly paid sales tax, a move experts said could boost VAT refunds.

The European Court of Justice was ruling on a case brought by UK retailer Marks & Spencer (MKS.L), which had argued it was entitled to a full refund of wrongly paid value-added tax on sales of its chocolate teacakes.

The court said an EU state can refuse to reimburse wrongly paid VAT on the basis of "unjust enrichment" -- but only if fiscal neutrality and equal treatment are observed.

The sums involved for the company are tiny but the principle could make it easier for people to claim refunds, experts said.

When VAT was introduced in Britain in 1973, the store's "teacakes" were classified as biscuits and therefore subject to the standard sales tax rate. Cakes are zero rated.

In 1994, Britain's customs authority admitted the teacakes should not be subject to VAT and the company claimed a 3.5 million pound ($6.9 million) refund.

Customs paid only 88,440 pounds to the company, saying most of the VAT burden had been passed on to customers and that paying the refund in full would amount to "unjust enrichment".

Britain's House of Lords will decide whether in light of the EU court ruling Marks & Spencer can have a full refund.

The British parliament's upper chamber would have to grant the refund if it accepts that other retailers in a similar position have already won refunds.

Tax experts said the ruling ended a situation whereby the government could claim unjust enrichment for not refunding wrongly paid VAT but a taxpayer could not. "The court is setting aside some of the unjust enrichment argument put forward by a member state," said Chas Roy-Chowdhury of the Association of Chartered Certified Accountants.

"It makes it less of a one-way street and much more of an evenly handed approach to incorrectly applied VAT as before the odds were stacked against the taxpayer," Roy-Chowdhury said. (Reporting by Huw Jones; Editing by Dale Hudson)