In a surprising case heard recently at the European Court of Justice (ECJ) it was held that UK VAT law was incompatible with European law. This means that there is potentially a forthcoming change in the way that UK companies handle their VAT reclaims for certain expenses paid to employees, particularly road fuel costs.

The current situation

Under general European VAT law a VAT registered employer cannot take input tax relief on expenses incurred by the employee when the employee:

• is free to choose the supplier
• is free to buy whatever is required
• is responsible for payment
• does not have the authority to make the purchase in the employer’s name.

(Note that if the expenses are incurred on an employer’s credit card, VAT relief can legitimately be obtained.)

However, these rules have been relaxed in the UK by certain concessions and a statutory provision in respect of road fuel. The recovery of input VAT on certain subsistence payments, relocation expenses, mobile phone costs and road fuel are all specifically exempted from the general prohibition.

The European Commission (EC) has not been happy with this, taking the view that the UK law allowing such reclaims of employee expenses was in breach of the European Sixth Directive on VAT. They stated that as the VAT registered employer is not the recipient of the transaction and has not got an invoice in its name then it cannot claim the VAT back.

The UK VAT Commissioners were given two months to respond to the initial view of the EC and they did so by defending UK law. After a similar case heard by the ECJ involving the Netherlands found in the EC’s favour, the UK case was referred to the ECJ and the Advocate-General handed down a verdict against the UK on 10 March 2005.

So what next?

HM Customs & Excise have yet to publish a response on the matter. Barnes Roffe spoke to a representative from HM Customs & Excise on 15 March 2005 and all they could advise was that the position might change in the future. They went as far as to say that they could not rule out amounts already claimed being repayable by VAT registered parties. It would be difficult for any change in treatment to be applied retrospectively, but not impossible.

Barnes Roffe Topical Tips

• Continue as before, but with caution.
• Make sure you can calculate the relevant amounts you are liable for, if and when the position changes