The teacake defence

Posted on: 4 September 2026

For twenty-one years Marks and Spencer charged standard-rate VAT on its teacakes. It did so because the Commissioners had told its supplier to, and in September 1994 the Commissioners conceded that the things had been cakes all along and should have been zero-rated throughout. M&S asked for its £3.5m back. It got £88,440 plus interest, because the Commissioners invoked section 80(3) of the Value Added Tax Act 1994, the defence which says that repayment need not be made where it would unjustly enrich the claimant, and the tribunal accepted expert evidence that ninety per cent of the tax had been passed into the shelf price. The company spent the better part of a decade in the courts over the remainder, as far as Luxembourg and back, and the point of law it was fighting had been settled in outline since Hans Just in 1980. A state that has wrongly taken your money is not obliged to give it back to you if you have already recovered it from somebody else.

That doctrine is not a technicality of British indirect taxation. It is the only serious institutional attempt anyone has made at the problem of what to do when a tax turns out to have been unlawful and the burden has already dispersed into the price of everything. It is worth holding in mind while watching what is currently happening in the United States, where the same problem has arrived at roughly forty-seven times the value of the teacakes claim and is being resolved by writing cheques to the wrong people.

On 20 February 2026 the Supreme Court held by six to three that the International Emergency Economic Powers Act does not confer on the president a power to impose tariffs of indefinite scope. The judgment did not order repayment. That came from the Court of International Trade, where on 4 March Judge Richard Eaton, in Atmus Filtration, directed customs to reliquidate every entry not yet final as though the IEEPA duties had never existed. By a filing in August the government had returned about $100bn of an estimated $166bn. It goes to the importer of record, which is to say the party whose name was on the customs entry, and the American statutory scheme contains nothing resembling section 80(3).

The results have been showing up in quarterly earnings all summer. Walmart has taken $2.9bn. Target $994m, of which $752m dropped into net earnings and added $1.65 to earnings per share. Home Depot $730m, TJX $331m, Lowe's a modest $80m with more expected. Amazon around $640m, FedEx $800m, Ford a one-off benefit of $1.3bn. Five big retailers reporting in a single week in August declared a little over $5bn between them, roughly five per cent of everything repaid to that point, which gives some sense of how far down the corporate register the money reaches.

The sharpest illustration is a smaller company. Abercrombie & Fitch closed its second quarter on 1 August with net sales of $1.27bn, up five per cent, and adjusted earnings of $4.17 a share against a consensus of $1.99. Of that $4.17, some $1.75 came from about $100m in pre-tax tariff refunds, on the company's own disclosure. The beat was $2.18 and four fifths of it was a court ruling. Operating margin came in near twenty per cent against the ten the company itself had guided to three months earlier. The shares rose thirty-six per cent on 26 August, the largest single-day move since November 2025, helped along by a short interest of around nine per cent of the float and by the $282m the company had already spent this year retiring seven per cent of its own shares, which had quietly shrunk the denominator before the refund ever arrived. A good deal of commentary that week attributed the move to the omnichannel rebuild Abercrombie has been running since it shut its European flagships, and that rebuild is real, but it was not what the market repriced.

What makes the American arrangement worth studying is not that companies are keeping the money. It is that the question of whether they should was never posed. The refund follows the paperwork. Where the duty appeared as a discrete line on an invoice it is being handed back down the chain, which is why FedEx, UPS and DHL are reimbursing the customers they billed for it and why Amazon says it will do so in a limited set of cases. Where the duty was absorbed into a shelf price it stays put. Target's finance director Jim Lee has confirmed there will be no customer refunds and that the money will show up as lower prices, more than ten thousand of them in the quarter. Walmart has said much the same in different words. The Consumer Federation of America has been reduced to the language of moral obligation, which is what one reaches for when the legal obligation has been established not to exist.

I do not think this is a scandal and I am not sure it is even avoidable. Britain asked the right question and the answer it arrived at was that M&S should get £88,440 and the Exchequer should keep the rest, which returned precisely nothing to anyone who ever bought a teacake. The passing-on defence protects the public purse from double payment. It does not locate the person who bore the burden, because no system can. Incidence spreads across the manufacturer's margin, the retailer's margin and the final price in proportions that vary by product and by season, and the National Retail Federation has helpfully pointed out that not every American retailer raised prices when the duties landed in the first place. There is no ledger anywhere that could tell you what fraction of a given shirt was tariff. The choice on offer is therefore between the state keeping money it should never have taken and the importer keeping money it largely recovered from its customers, and both jurisdictions have simply picked one.

Where the American answer goes further is in what happens next. Goldman Sachs described the windfall in a note on 17 August as a one-off being spent on marketing, price cuts and share repurchase. Masco has put $95m net towards buybacks and acquisitions. Abercrombie has raised its full-year guidance with a promise of at least $500m in buybacks. A non-recurring receipt, generated by a constitutional ruling on the limits of executive power, is being converted into a permanent reduction in shares outstanding. The cash flow happens once. The change to the capital structure does not reverse. Whoever holds the stock after the repurchase owns a larger share of the company for good, and that larger share was bought with money the state was compelled to return because it should not have taken it, collected in the first instance from people with no standing to ask for it. Nobody decided on this transfer. It is the residue of a procedure whose only purpose was to put things back as they were.

For anyone wanting a test rather than a thesis, Abercrombie provides a close one. Third-quarter guidance is for revenue growth of five to six per cent and earnings of $2.90 to $3.20 a share, with no refunds inside it. Strip the refund out of the second quarter and you get about $2.42. If those numbers arrive in late November the operational story stands up on its own. If they do not, what the market applauded in August was a court. CNBC has taken to calling this earnings season a choose-your-own-adventure, since every company has decided for itself where to put the refund and how far to isolate it, and the analysts are still arguing about who is actually doing well. Three weeks to tell a judgment from a stockroom is a long time for a mechanism that advertises itself as a price discovery system.