A 12-year storm over teacakes looks set to earn Marks & Spencer a £3.5m ($6.9m) tax refund, in a small but sweet victory for the retailer as it battles shareholder discontent over a planned boardroom shake-up.

Europe’s highest court on Thursday ruled that M&S should receive full repayment of value added tax levied on the cakes for more than 20 years, when they were incorrectly classified as “biscuits”.

The retailer said it hoped the decision would bring about a speedy resolution to a case that has been in and out of the courts since the mid-1990s, resulting in two separate trips to the European Court of Justice.

The dispute originally sprang from the misclassification of a group of M&S products ranging from teacakes to bottled water and gift vouchers under the VAT framework.

While cakes, for example, received a zero-rating for VAT purposes, biscuits were taxed at a standard rate.

UK tax officials admitted that they had mistakenly lumped M&S’s chocolate-covered marshmallow teacakes into the biscuit category in 1994.

They balked, however, at giving the retailer a full refund of tax paid on the grounds that it would be a form of “unjust enrichment”.

Revenue & Customs argued that around 90 per cent of the VAT had already been passed on to M&S’s customers in the form of higher prices.

The ECJ swept that argument aside on Thursday in a long ruling, saying that the UK had failed to apply the unjust enrichment principle equally to all refund claimants.

The case will now return to the House of Lords for a final determination.

“Common sense has prevailed,” said Tony McClenahan, head of indirect tax at Deloitte & Touche. “This is a sweet victory for M&S, for whom this was as much a matter of principle as about recovering the money.”

Tax professionals said that while the ruling would have a limited effect on other companies, it highlighted the problem of poorly implemented legislation in Britain. The Treasury is already facing a deluge of VAT claims – estimated at several billion pounds – stemming from a January decision involving magazine publisher Condé Nast.

In that case, the House of Lords ruled that Revenue & Customs failed to provide taxpayers with a reasonable transitional period when it imposed a three-year cap on so-called input VAT claims in 1997.

“The UK legislators have already been found wanting in the courts this year,” said Chris Fyles, indirect tax partner at KPMG. “This is another case of poorly implemented legislation.”

Revenue & Customs said it was still considering the “very complex” judgment. “It would be premature to make any comment.”