Government officials are considering their response to a European Court of Justice (ECJ) ruling that declared the law allowing firms to claim back VAT on staff mileage expenses as illegal.
The ruling is detailed and complicated and it will be at least three months before any legislative changes come into effect, according to the Treasury, but fleets will need to act immediately to understand its potential impact.
The ruling affects all aspects of fuel reimbursement, including companies that pay their employees a pence per mile rate to cover fuel and then claim VAT back under current rules. The ECJ said Britain’s VAT (Input Tax) (Person Supplied) Order 1991 – allowing this practice in the UK – breaks the European Union’s (EU) sixth VAT directive.
Because the person buying the fuel is not a VAT-registered company, the ruling states that VAT cannot be reclaimed.
It said: ‘The order permitting employers to deduct VAT on sums reimbursed to employees for the vehicle fuel they buy is incompatible with (EU) law.’
Judges explained their concern focused on the British order’s failure to ‘ensure that the deducted VAT relates exclusively to fuel used for the purposes of the employer’s taxable transactions’.
The court highlighted a UK clause saying VAT deductions could be made for fuel claims without definitive proof that it was all business mileage.
If the ruling is introduced, a reclaim will only be possible if there is a formal VAT invoice.
Experts have predicted it will create a massive shake-up in the industry, with a surge of demand for corporate purchasing cards, including fuel cards.
Garry Hobson, managing director of Interleasing, said: ‘This could cost British businesses as much as £1.2 billion a year. This is based on the 2.8 million company car drivers, as well as the 2.5 million drivers who use their own vehicles for business, driving a conservative 5,000 miles per year.
‘This ruling leaves Britain’s mileage allowance system in limbo and it is vital that UK Customs clarifies the timescales and issue of backdating payments quickly.’
Mike Waters, head of market analysis at fuel card supplier Arval, said it was important fleets do not panic. He said: ‘Although action will need to be taken quickly it is not recommended fleets have a knee-jerk reaction such as ditching pay and reclaim for all high-mileage drivers.’
Chris Davies, head of marketing at AA Business Services, said: ‘There is no doubt that it will see many businesses diving head-first into fuel card schemes for their high-mileage drivers. However, we urge caution until timescales have been announced by UK Customs.’
British Vehicle Rental and Leasing Association director general John Lewis said: ‘While it is a result we were expecting, we are disappointed at the inflexible application of EC-wide VAT rules which will have significant implications for businesses.’
A spokesman for the Treasury said the ruling was specific to fuel issues and comments made by the ECJ made clear it could not be applied to other areas for VAT reclaims.