This right is enshrined in UK tax law, but does not comply with European legislation which insists that companies can only deduct VAT on goods which are supplied directly to the employer, not employee, and where the invoice is made out to the employer. The 'pay and reclaim' system meets neither of these criteria, because although the fuel is used for business purposes, it is supplied to the employee, and it is the employee who is invoiced for it.
Teresa Ahern, senior manager with PricewaterhouseCoopers VAT consultancy, said: 'If the UK does not change the law which governs the UK rules, the EC may initiate proceedings against the country this month.' The EC has already started proceedings against the Netherlands and is planning to send a 'reasoned opinion' to the UK Government asking it to make the necessary changes to the law to harmonise the UK tax system with the rest of Europe.
This would immediately add 17.5% to corporate fuel bills by denying companies the right to recover VAT on fuel bought for business purposes where a driver paid with his own money. If UK law is changed, Steve Holloway, principal manager of Deloitte & Touche's VAT group, said more fleets may adopt fuel cards. These appear to circumvent the problem because the cards, invoices and accounts are all in the name of employer, rather than employee.