UK seeks to soften VAT blow

The government has pledged to minimise the impact on business of a European Court of Justice decision that overturns the UK’s rules on the VAT treatment of travel expenses.

Link: ECJ ruling deals blow to UK tax sovereignty

Under UK tax rules, businesses can reclaim VAT on road fuel bought by employees for work purposes, when the employee is reimbursed by their employer for the cost of the fuel. But the ECJ found that this was ‘not compatible’ with the EC’s sixth directive, which states that to exercise this right, the employee would need an invoice for the petrol.

However, concerns have been raised that the ruling affects all purchases made by an employee – not just fuel – including hotel and food bills.

Malcolm Nichols, VAT principal at Menzies, said the judgment ‘extended’ beyond just reclaiming VAT from fuel expenses incurred on business.

‘The decision basically means that any purchase the employee makes, which the employer then reimburses, will now no longer be subject to a VAT reclaim. The UK government is considering its position – but the sixth directive is clear – how Customs can alter this, I’m not too sure.’

A Customs spokesman said businesses should stick with the current UK rules for the time being, while the government considers its position.

‘We’re committed to minimising burdens on business,’ the spokesman said. ‘We’re expecting the commission to call for compliance on the judgment in the next two to three months. We then have [another] two to three months after that to comply. The immediate issue is to study the terms, assess it, consult with businesses and then issue our guidance.’

The statement followed calls for European Union ministers to extend national governments’ rights to introduce reforms to VAT rules to prevent tax evasion.

Under the sixth directive, the EU Council of Ministers may unanimously authorise any member state to introduce special measures contrasting with the legislation’s general rules, if it fights tax evasion or avoidance.

However, this system is time consuming, spawning more than 140 derogations from this key EU law – a number growing through requests from the 10 new eastern and southern member countries.

As a result, the European Commission has proposed amending the directive so that certain derogations are made automatically available to national governments. These would be measures that had ‘already proved themselves effective and which tackled problems which were shared by more than one member state’.

Related reading

HMRC banknotes