ECJ Takes Another Swipe At National Tax Laws

by Ulrika Lomas, Tax-News.com, Brussels

11 March 2005

In yet another judgement undermining national tax rules in the EU, the European Court of Justice yesterday ruled that the UK is incorrect in allowing employers to reclaim VAT on claims for fuel submitted by employees.

Said the Court:

'The order does not ensure that the VAT deducted relates exclusively to fuel used for the purposes of the employer’s taxable transactions. According to the Sixth VAT Directive, a taxable person may deduct VAT in respect of goods and services used for the purposes of his taxable transactions. In order to exercise this right, a taxable person must hold an invoice. A United Kingdom order of 1991 provides that road fuel bought by employees is treated as supplied to the employer when the employer reimburses the employee. Reimbursement may be made either by means of a mileage allowance or on the basis of the actual amount paid. Where the fuel is treated as having been supplied to the employer for his requirements, he may deduct the VAT paid.

'Considering that the grant of the right to deduct was not compatible with the obligation to hold an invoice, the Commission brought infringement proceedings against the United Kingdom. When examining the matter, the Commission furthermore concluded that the right to deduct was also contrary to the principle that only VAT on goods and services supplied to a taxable person for the purposes of his own transactions may be deducted.

'The Court observes that the provisions of the Sixth VAT Directive clearly specify the conditions giving rise to the right to deduct and the extent of that right. They do not leave the Member States any discretion as regards their implementation. The Sixth VAT Directive makes it clear that a taxable person is authorised to deduct VAT in respect of goods and services supplied by another taxable person for the purposes of his taxable transactions.

'It is true that in carrying out their work employees act on behalf of their employer. Nevertheless, the Court finds that the UK Order does not make the right to deduct subject to the condition that the fuel bought by the employee should be used for the purposes of the employer’s taxable transactions. On the contrary, that order permits the deduction of VAT on the amount of fuel reimbursed computed by reference to the total distance travelled, ‘whether or not including distances travelled otherwise than for the purposes of the business of the taxable person’. It is therefore possible for the employer to deduct VAT in respect of fuel used by the employee for his private purposes. It follows that the UK Order is not compatible with the Sixth VAT Directive since it does not guarantee that the VAT deducted relates solely to fuel used for the purposes of the taxable person’s taxed transactions.'

This is one ECJ ruling that the UK Treasury will privately be happy about, although UK motorists will wonder whether their employers will swallow the cost or pass it on.

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