London Briefing/Fiona Walsh:It has often been observed that her majesty's revenue and customs (HMRC) does not know its elbow from another part of its anatomy. It certainly doesn't know a biscuit from a teacake - a mistake that could end up costing the British government £3.5 million.

The row over Marks & Spencer's chocolate-covered marshmallow teacakes has rumbled on for decades. The retailer insisted they were cakes while the tax authorities instead ruled that they were biscuits.

Arcane it may appear, but these things matter - classification of the teatime treats was crucial because chocolate-covered biscuits are deemed to be confectionery and thus subject to standard-rate VAT, while other biscuits and cakes, as food, are exempt.

The dispute covered sales of M&S's teacakes from the introduction of VAT in 1973 until late 1994, when the tax authorities finally admitted they had got it wrong. In the interim, however, HMRC had extracted £3.5 million from M&S in VAT. The admission that the teacakes were not chocolate-covered biscuits but mini-cakes after all followed another now infamous battle over the classification of the Jaffa cake back in 1991.

A tribunal was charged with deciding the great Jaffa cake debate. There was much discussion about the fact that biscuits go soft when they become stale, while cakes go hard. And Jaffa cakes beyond their sell-by dates definitely toughen up.

Manufacturer McVities prepared a special 12-inch version for the occasion, which apparently did the trick - the sight of the expansive sponge base encouraged the tribunal to rule that while it did indeed have some characteristics of a biscuit, the Jaffa cake was, in fact, a small cake.

While the battle over the M&S teacake classification was won more than a decade ago, the row over the VAT reclaim has rumbled on ever since.

It flared back into life last week when the advocate-general of the European Court of Justice said that traders had a right to a refund of any VAT wrongly charged, an opinion which would appear to sanction the return of the full £3.5 million to M&S.

It is a blow to the British tax authorities, which have returned only a fraction of that amount to the retailer. As well as imposing a dubious three-year limit on repayment claims, they argued that, since 90 per cent of the VAT had been passed on to the store group's customers, repaying the full figure would bring "unjust enrichment" for M&S.

That argument has been rejected by the advocate-general, although the long-running teacake case is not over quite yet. The European Court will now consider the matter further and a final verdict is scheduled for early 2008.

However, the court is widely expected to back the refund of the full £3.5 million to M&S in what will be a welcome boost to its coffers, particularly if the retail scene is as dire next year as most analysts are predicting.

140,000 workers win compensation

Another long-running battle reached a conclusion earlier this week when the British government finally agreed to compensate 140,000 workers who were left stranded without pensions when their companies collapsed.

They had been assured their pension savings would be 100 per cent safe, but found themselves left with virtually nothing, often after spending their entire careers paying into the company scheme.

The biggest group of victims worked at Allied Steel & Wire (ASW), which collapsed in 2003. ASW workers were not covered by the Pension Protection Fund, which was introduced in 2005 and guarantees employees 90 per cent of their accrued pensions, subject to an annual cap of £26,000.

Instead, they came under the government-funded Financial Assistance Scheme, which covered workers whose pension plans closed between 1997 and 2005. It was a far less generous scheme, unprotected from inflation and subject to an annual cap of £12,000.

After tireless campaigning by pensioners - who stripped naked to protest outside parliament and at numerous Labour party conferences - the government will now pump £2.9 billion into its Financial Assistance Scheme, putting it on an equal footing with the Pension Protection Fund.

Pensions secretary Peter Hain talked of a "just and final settlement" when he announced the U-turn on Monday.

The pensioners were jubilant, as was Dr Ros Altmann, the former Downing Street pensions adviser who took up the case and refused to let it drop despite the intransigence of the Labour government.

As they celebrated their victory, many spoke movingly about those for whom the settlement came too late; those who were left to spend their final years in penury rather than the comfortable retirement they had saved so hard for.

It is to the government's lasting shame that it dragged its heels for so long, forcing one of the most vulnerable groups in society to battle for what was righfully theirs.

• Fiona Walshwrites for the Guardian newspaper in London