Customers had paid VAT for 20 years before the authorities accepted the product was a cake, not a biscuit, and therefore does not command VAT.

Europe's highest court, ruled that the retailer had been treated in a discriminatory fashion compared with its rivals and was entitled to a full repayment. Now British judges must decide whether retailer can recover the money.

Britain had argued that paying back the money would "unjustly enrich" M&S as customers had paid the money.

In today's ruling the ECJ said: "The national court must, in principle, order the repayment in its entirety of the VAT repayable to the trader who has suffered discrimination in order to provide compensation for the infringement of the general principle of equal treatment, unless there are other ways of remedying that infringement under national law."

Revenue and Customs said in a statement. "This is a very complex judgment on which it would be premature to make any comment until the House of Lords has handed down its judgment,"

A spokesperson for Marks and Spencer said: "It does look encouraging. However, it is a complex matter and we are reviewing the decision of the ECJ with our advisers."