The EC is demanding that the UK reforms its VAT laws that allow companies to recover VAT on expenses incurred by staff driving on business.
However, Customs & Excise has pledged to defend the right of UK fleets to operate 'pay and reclaim' systems for staff fuel reimbursement, in a case centring on a tax law technicality.
The Commission insists that firms can only recover VAT on business expenditure where there is no break in the supply chain between VAT registered parties.
If an employee uses his or her own money to buy goods for business (even if they are then reimbursed for the expenditure by the employer), the EC claims there has been a break in the VAT chain because individuals are not VAT registered.
As a result it claims VAT recovery should be blocked on such transactions, which would cost firms an extra 17.5% on fuel bills.
Launching its infringement proceedings, the EC said: 'UK law allows an employer who is a taxable person for the purposes of value added tax (i.e. a VAT-registered business) to deduct either part of an allowance paid to an employee for business use of a private car, or VAT on the fuel costs actually incurred by the employee.
However, under Community law VAT cannot be deducted in this case because the transactions concerned are supplied to the employee rather than the taxable employer.'
In a similar case last November the ECJ upheld the EC's position against the Netherlands (which operates similar VAT rules to the UK).
However, a Customs & Excise spokesman said: 'While we supported the Dutch action in principle, we do not apply the rules in practice in the same way.'
She added that the UK would defend its position, and said: 'UK firms can continue to apply the current rules.'
PricewaterhouseCoopers has advised businesses to evaluate the possible financial implications and remedial actions if the ECJ ruling goes against the UK.
Fuel card specialist Overdrive claimed that the UK is virtually certain to lose if it contests the case, and said: 'In future, firms will only be able to reclaim VAT if they buy the fuel themselves, by issuing drivers with fuel cards or company credit cards.'