The government could be left facing a £3.5 million bill following a 12-year row over the taxation of Marks & Spencer's (M&S) chocolate teacakes.
HM Revenue and Customs (HMRC) could be forced to hand back the value added tax (VAT) paid by the high street retailer on its chocolate treats after they were wrongly classified as biscuits by tax officials.
Yesterday a key adviser to the European Court of Justice (ECJ), advocate general Juliane Kokott, ruled traders had a right to claim a refund of any VAT wrongly charged a ruling which could prove costly for the government if the court agrees with her opinion in a future hearing.
After VAT was introduced in 1973, tax officials had classed all chocolate-covered products as biscuits, rather than cakes, meaning they were subject to the tax. In contrast, chocolate cakes are zero-rated and so no VAT is payable on them.
But around 20 years later government tax chiefs admitted they had made a mistake, declaring chocolate tea cakes were in fact cakes as opposed to biscuits.
In 1995, M&S subsequently brought a legal case against the government in a bid to reclaim the VAT paid on its chocolate tea cakes.
But Customs and Excise officials refused to pay back the full amount on the grounds most of the VAT had been passed on to M&S customers and that an entire refund would therefore mean "unjust enrichment" for the retailer.
After the Court of Appeal ruled in the government's favour over the row, M&S sought a higher ruling from the House of Lords which then asked the ECJ to decide the matter.
An M&S spokeswoman said the company was "still reviewing the contents" of yesterday's opinion by the ECJ's advocate general and would be unable to comment further on the case until the expected final decision by the court some time next year.
Meanwhile a spokesman for HMRC said: "We note the advocate general's comments and await the court's judgement with interest."