The European Commission brought the case against the Netherlands (which has very similar VAT rules in this area to the UK) and the ECJ reached its verdict surprisingly quickly - its ruling was not expected for another three to six months.
The ECJ summary said: 'Dutch legislation allowing the deduction for the purposes of VAT of a certain amount of an allowance paid by an employer to an employee using his own vehicle for business purposes does not comply with the Sixth VAT Directive.'
Dutch tax laws had allowed companies to recover VAT on payments made to reimburse employees driving their own cars on business, covering acquisition, fuel, maintenance and repair costs on a weighted basis according to the business use of the car.
The court ruled, however, that VAT can only be recovered on the supply of goods and services from one VAT-registered business to another. 'An employee acting for his employer cannot have the status of taxable person, even where he uses his own vehicle for the purposes of the business,' said the ECJ.
One of the difficulties of the case involves the payment of a flat mileage rate to reimburse staff, rather than using actual invoices for fuel and maintenance expenditure.