Fleet News

Europe threatens UK's system of VAT returns

A BRITISH VAT regulation simplifying tax returns relating to company cars could effectively be declared illegal next year by the European Court of Justice (ECJ).

The rule involves HM Customs & Excise restricting to 50% the proportion of company car hiring or leasing charges that can be declared as a business expense on VAT returns, leading to a reduction in a VAT bill.

This regulation applies where a company car is also used for private purposes and it also frees a business hiring or leasing a car from having to keep records of private mileage, accounting for tax payable on each journey.

The problem with this rule is that it does not comply with standard European Union (EU) VAT directives, even though the European Commission admits it is a 'simplification' designed to help the UK 'combat tax evasion and tax fraud'.

As a result, the British Government has had to apply – every few years – to the Commission and the EU Council of Ministers to be given special dispensation to operate the system. Brussels has so far agreed in 1995 and 2000 to grant the UK derogations from standard European VAT legislation, but the latest authorisation expires on December 31 this year and the Commission has voiced concern about its long-term future.

In a memorandum to EU ministers, Brussels has warned that an ECJ ruling requested by Germany's federal finance court could effectively ban the UK system. German and EU judges are examining the legality of a broader German practice, which limits to 50% deductions to VAT charged on all expenditure relating to vehicles (including purchase, hire and running costs).

The Commission note said: 'The outcome of this preliminary ruling might therefore be of considerable importance for the question of whether such (UK) measures could be authorised in future.'

It has asked ministers to only extend the British VAT simplification system for one more year. A similar decision was made earlier this year regarding the German system, which also needs special dispensation.

  • Subscribe to Fleet News.
  • Get the news delivered to your desktop
  • Leave a comment for your chance to win £20 of John Lewis vouchers.

    Every issue of Fleet News the editor picks his favourite comment from the past two weeks – get involved for your chance to appear in print and win!

    Login to comment

    Comments

    No comments have been made yet.

    Compare costs of your company cars

    Looking to acquire new vehicles? Check how much they'll cost to run with our Car Running Cost calculator.

    What is your BIK car tax liability?

    The Fleet News car tax calculator lets you work out tax costs for both employer and employee