Brussels VAT ruling to cost business £250m

The law allowing firms to claw back VAT on staff mileage expenses was declared illegal yesterday, provoking anger from the Treasury and fears that business could lose a concession worth £250m.

The law allowing firms to claw back VAT on staff mileage expenses was declared illegal yesterday, provoking anger from the Treasury and fears that business could lose a concession worth £250m.

The ruling from the European Court of Justice means that ministers will have to rewrite and tighten the rules to ensure that VAT is reclaimed only for business - and not private - miles. Tax laws currently allow employers to qualify for a VAT deduction on the fuel element of the mileage reimbursed to the employee.

Yesterday's ruling follows a complaint from the European Commission and highlighted that VAT could be reclaimed for mileage which might not been incurred on business. It also hinged on the fact that the system does not ensure that the fuel supplied is to the company rather than the driver. That means the company will not normally hold a VAT invoice in its name.

Dawn Primarolo, the Paymaster General, said she was "disappointed" by the decision and warned: "The European Commission will never convince the peoples of Europe that they are genuinely committed to an agenda to promote competitiveness, deregulation, enterprise and economic growth if they continue to undermine the interests of business by seeking to enforce the EC-wide VAT rules in this inflexible and impractical way."

Ministers hope the law can be redrafted so that firms do not lose their tax reimbursement for business mileage. But some business leader fear the ruling will lead to similar rebates on VAT paid on hotels and subsistence to be challenged by the European Commission.

The chief economic adviser to the Confederation of British Industry, Ian McCafferty, said that "preventing companies qualifying for a VAT deduction on legitimate staff fuel expenses would impose significant costs on business".

He added: "It is vital that the Government consults fully with employers before any redrafting of UK tax rules so that the cost impact can be minimised."

Ashley Whittaker, the chief executive of GlobalExpense which provides expense management services for a number of blue-chip companies, said: "Many fear that this latest decision could have a knock-on effect and eventually it will be extended to all expenses reimbursed to employees that are incurred in the employees' name rather than the employers, such as hotel, food costs, phone bills and taxis."

He added that, left uncorrected, the law would force firms to ensure "that employees pay for the goods or services using a company-settled corporate credit card or fuel card and, where possible, they need to get the employer's name on the invoice, especially if this is for a hotel stay".