THE European Commission is proposing a massive shake-up of fleets' right to recover VAT on company cars, fuel, maintenance and repair expenditure. The proposals form part of an EC initiative to simplify and harmonise VAT recovery among member states.

The Commission wants to introduce the changes by January 1, 1999, although tax experts say this deadline is unrealistic, while HM Customs & Excise claims the proposals are too complicated and expensive. The proposed regulations would allow:

• Outright purchase fleets to recover VAT on new car acquisitions so long as business use of a car is more than 90%, extending to them the current VAT advantages enjoyed by UK leasing companies, daily rental firms, driving schools and taxis.
• No VAT recovery on expenditure on company cars whose business use is less than 10%.
• Countries to choose one of two VAT recovery systems - the 'normal' and the 'simplified' - for company cars whose business use is between 10% and 90%.
• The proposed 'normal' rules would allow fleets to recover VAT on the price of a car and fuel, but then repay VAT on the proportion of private use.

But for any lease or maintenance payments fleets would only be able to recover VAT according to the proportion of a car's business/non-business use. Currently HM Customs & Excise blocks 50% of the VAT recovery on lease rentals, but allows fleets to recover all the VAT on maintenance expenditure.

The EC's alternative proposition of 'simplified' rules would allow countries to set a limit of between 50% and 100% for VAT recovery, and this limit would apply even if the proportion of business miles was higher. Customs has condemned the 'simplified' system as 'complex', calculating that it would cost the UK Exchequer £500 million in its first full year of operation. Fleets have until December 11 to give HM Customs & Excise their reaction to the proposals.