UK employers have been able to recover VAT on the fuel element of mileage expenses claims from employees for many years.

The current system of reclaiming VAT on fuel used for business travel on the basis of a mileage rate works well and is easy to operate.

European Court of Justice (ECJ) Ruling

The ECJ has recently ruled that allowing employers to deduct VAT input tax on sums reimbursed to employees for the motor fuel they buy is incompatible with EC law.

The Court said in a statement that the UK order permitting the deduction does not ensure that the VAT deducted relates exclusively to fuel “used for the purposes of the employer’s taxable transactions”.

The “mileage rate” system does not ensure that the fuel is supplied to the company and not the driver, and the company typically does not hold a VAT invoice made out in its name.

Leading tax advisers have claimed that the European Court of Justice (ECJ) “brushed aside” years of UK practice in declaring that businesses can no longer reclaim VAT on business fuel using a mileage rate.

What does it mean for UK Businesses?

Firstly back in 1999 when the case began (!), customs put in writing that there would be no retrospective charge, any charges being announced in advance.

There should not be much change for companies which use fuel cards, as these already meet the requirements of the judgement.

For companies where there are mostly perk cars, and business mileage forms a smaller proportion of the fuel purchases made by employees, it may be difficult to force employees to buy their fuel on a fuel card.

Here, the question will be how to meet the evidential requirements set by the ECJ: ie the business must

• incur the cost from a taxable person;
• not claim input tax on goods or services which are not used in the course of furtherance of the business; and
• ensure that it holds a valid VAT invoice in support of the claim.

The first of the above measures is the main one that will require a change in procedures.

Whilst it is hoped that Customs and Excise will be as flexible as possible – for example, allowing a less detailed VAT invoice to be used which would not be in the name of the company, there is still doubt as to whether this would be possible, even though less detailed VAT invoices are used to evidence other retail claims for deduction.

Any changes are also likely to have an impact on employee terms and conditions, not to mention that revised arrangements must comply with PAYE and NIC requirements as well as VAT.

We are awaiting a statement from HM Customs, so cannot yet provide definitive advice, however businesses should start to consider alternative arrangements to mileage allowances when meeting business fuel costs.

If you have any queries regarding this article please contact Steve Cook, Tax Partner on either steve@nunn-hayward.com or 01753 888211.

On the 27th April Justice Park took the unusual step of reading out his own notes for his judgement in this landmark case.

The initial reaction of those close to the case was expressed in terms of “Dismay” and “Black Day”.

The Judge himself stated that in his view, “apprehensions that almost every case of a husband and wife company is going to be affected by this case are greatly exaggerated”. Well know professional advisors are more sceptical of this view and in particular how the new merged HM Revenue & Customs will interpret this case.

We at Nunn Hayward have been following events closely and will continue to do so over the coming weeks. The taxpayers in this case now have six weeks to consider an appeal.

There is no statement from HMRC yet. We will advise our Abacus Readers, as well of course our Nunn Hayward clients once we are able to provide guidance with some degree of certainty.

If you have any queries regarding the above please contact Steve Cook, Tax Partner on either steve@nunn-hayward.com or 01753 888211.

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