Richard Watson, VAT partner at Price Waterhouse, said: 'The case applies to any company which buys a car, cannot deduct the VAT, and because of the level of discount they achieve and the length of time they hold the car, makes a profit when they sell it.' Until the European Court of Justice ruling this scenario would have seen the company obliged to account for VAT on the profit margin it achieved, and Watson advised affected companies to lodge backdated claims for this overpayment of VAT as soon as possible.

In reality few fleets manage to record a profit when disposing of their vehicles since cars are generally depreciating assets. Consequently the case is only likely to affect large fast-cycle fleets, franchised dealerships' demonstrator models and bodyshops' courtesy cars. Due to a three-year cap on retrospective VAT claims imposed by the previous Government, the case does not affect daily rental companies which have been able to recover VAT on cars they buy since 1992, or any cars bought by leasing companies since August 1995.

A spokesman for Customs & Excise said guidelines on the ruling would be issued soon, leaving fleets to decide whether to apply them until legislation was introduced. He estimated that back claims could mount up to as much as £50 million. The ruling does not affect the case brought by Royscot Leasing, TC Harrison and Allied Domecq over the right to recover input VAT on cars bought purely for business purposes.