The government is set to pay out hundreds of millions of pounds to businesses in overpaid VAT, after dropping its request for a ‘stay’ in the Fleming-Bodycraft case.

The Court of Appeal ruled in February of this year that Bodycraft, a motor trader who dealt mostly in second hand Aston Martins, could claim for overpaid VAT in excess of a time limit of three years imposed in the mid-1990s.

The court ruled that since there was no transitional period involved when the government introduced the three-year cap, the cap was incompatible with European Union law.

The news comes as Condé Nast, also pursuing a similar point, won a case at the Court of Appeal. Tony McClenaghan, head of indirect tax at Deloitte, said of the Condé Nast case: 'the claims are likely to amount to at least £100m.'

Though the government has not decided to cease pursuing the Fleming case, it has dropped its non-payment of the disputed overpayments, meaning it will pay out and seek to recover money later if it subsequently wins.

The case is one of more than 700 arising out of the introduction of the three-year rule. Paddy Behan, VAT expert at Grant Thornton, told Accountancy Age that the government’s move meant it might have to repay as much as hundreds of millions of pounds in tax.

Tax advisers have referred to the implications of the case as potentially ‘horrifying’ for the UK Treasury.

The Fleming-Bodycraft case is one of a series of actions that has included EMI, GMAC, Condé Nast and BT.

An HMRC spokesman said: ‘HMRC has reconsidered its position with regard to the application for a stay in the case of Michael Fleming-Bodycraft, and has decided to withdraw it. A Business Brief will be published in due course.’