The UK government has agreed to take a 'light touch' approach to enforcing a European law which makes it more difficult for company fleets to reclaim VAT on fuel purchased by their employees.

As of 1 January 2006, company drivers must provide VAT receipts to cover the cost of their claims in order for their employers to claim back the tax element. It follows the government’s amendments to VAT rules to meet the demands of the EU Sixth Directive and a European Court of Justice decision from last year.

'HMRC acknowledges that businesses will need a little time to make the necessary changes to their arrangements in order to hold VAT invoices in support of their claims,' a spokesman said. 'Therefore, HMRC will be administering the change with a light touch until such time as businesses have had time to adjust.'

Employees can purchase fuel used for business in several ways. It can be charged to an account, paid for by fuel cards or company credit cards, or purchased by the employees themselves, who then reclaim the cash. But ‘pay and reclaim’ is one of the most common methods, with employees then reclaiming the proportion that relates to work, either at cost, or using a pence-per-mile fee.

The Sixth Directive originally stated that only VAT-registered companies could reclaim the tax, having the effect that private purchases made by drivers were not eligible for a rebate.

The change could have cost UK businesses £1.2bn in lost tax claims or resulted in companies having to invest in fuel card schemes, regardless of the size of their fleets. Even for a 150-vehicle fleet, doing 10,000 business miles a year, its annual claw back of VAT would be £24,000.

Thankfully, the EU and the government have been flexible in their introduction of the new law, so as long as drivers provide a VAT receipt, companies can claim back the cost of the tax. But although this offered finance directors a reprieve, they are still not out of the woods.

There has been widespread confusion in the industry because there is no way of matching the value of a VAT receipt for a tank of fuel to an actual business mileage claim. And, during industry meetings, there has been concern that drivers will take many months to get into a steady routine of accepting a VAT receipt for every fill.

At a meeting of the London West region of Acfo, the fleet managers association, concerns were raised that staff may lose receipts, fail to ask for them, or hand in the wrong ones.

One FTSE-100 company has already warned employees that their mileage claims will be rejected if they don’t provide VAT receipts ­- a practice that all companies should adopt.

'We accept that the amount of the invoice in many cases will not match the input tax claim in respect of business fuel in any one claim period and invoices may cover more than one period, particularly where fuel is purchased towards the end of a period. It may be advisable for employers to arrange for their employees who use, or may use, their cars for business purposes to retain all fuel invoices,' the HMRC spokesman said.

Full details on the changes are available in VAT Info Sheet 22/05 at www.hmrc.gov.uk/home.htm.

John Maslen Supplements and events editor at Fleet News