Thursday, March 10, 2005

We have become more powerful VII

"And for all of those that say, if you look at the last thirty years, we have lost power to Brussels, actually it isn’t true. In the last, certainly in the last eight years, as we, the Labour government, have been more involved in Europe, so we have become more powerful and more prosperous, better able, literally to implement a patriotic case for the European Union."

Jack Straw
Foreign Secretary

BBC Today Programme, 9 February 2005

According to the Scotsman today UK firms could be facing extra costs of £250 million a year in VAT bills when, as expected, the ECJ rules that the way firms deduct VAT from the sums they reimburse to staff for work-related mileage breached the EU’s Sixth VAT Directive.

The rules, set up by the British government, allow employees incurring costs on behalf of their employers, either submit a petrol receipt for payment, or to claim expenses on a cost-per-mile basis.

The employer in turn then qualifies for a VAT deduction on the fuel element of the mileage payment – usually about 1.5 pence of every 10 pence per mile reimbursed to the employee.

Yesterday, however, the ECJ outlawed the 1991 VAT Order, saying the system “does not ensure that the VAT deducted relates exclusively to fuel used for the purpose of the employer’s taxable transactions“.

Despite the government arguing that it was up to member states themselves to arrange conditions and procedures for VAT recovery, the Court ruled that the Sixth VAT Directive clearly specified the conditions under which companies could recoup VAT. There was no national discretion in implementing the law.

The ruling explained that the UK 1991 Order allowed an employer to deduct VAT on the fuel supplied to employees carrying out the employer's work. But the UK order did not specify that the employer’s right to deduct VAT only applied to fuel bought by the employee "for the purpose of the employer’s taxable transactions".

On the contrary, said the judgement, the UK order allowed companies to recoup VAT from the taxman on the basis of the total distance travelled, even if it included "distances travelled otherwise than for the purposes of the business". The ruling continued: "It is therefore possible for the employer to deduct VAT in respect of fuel used by the employee for his private purposes."

It followed, therefore, that the UK Order was not compatible (with EU law) since it did not guarantee that the VAT deducted related solely to fuel used for the purposes of the taxable person’s (the employer’s) taxed transactions.

The Commission also argued that company VAT deductions were only valid on presentation of receipts in the company name – unlikely as most employees buy petrol in their own name or have no VAT receipt at all in the case of a fixed-rate mileage calculation.

According to chief executive officer Ashley Whittaker of GlobalExpense, a firm which handles expense claims on behalf of clients including Sainsbury’s and WH Smith, the risk now was not just of an extra quarter-of-a-billion pound cost to UK companies:

There is a danger that the Commission victory will have a knock-on effect of £1 billion in extra VAT costs, as eventually this approach will be extended to all expenses typically paid for by employees directly, such as hotels, subsistence food costs, phone bills and taxis. This is highly likely as this approach is the norm in most EU countries.
And all this is what happens after we "have become more powerful". As we have observed before, heaven knows what might have happened if we had not.

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