News
EUROPEAN COURT JUDGEMENT WILL FUEL BACKLASH FROM UK BUSINESSES
New VAT ruling will cost UK industry an estimated £¼ billion warns GlobalExpense
UK Businesses could pay nearly £¼ billion a year in additional VAT, following the judgement issued by the European Courts of Justice today (Thursday 10 March 2005), warns GlobalExpense (one of Europe’s largest payers of employee expenses).
The victory of the European Commission will have a huge impact on UK firms that pay mileage allowances to employees for business journeys: UK legislation will have change to prevent employers reclaiming VAT on the fuel element paid within mileage allowances reimbursed to employees for business use.
What is currently allowed?
The Inland Revenue allows mileage to be paid tax free at rate of up to 40 pence per mile for the first 10,000 miles travelled in a tax year by the employee. Customs & Excise then permits a VAT recovery on the fuel element at a rate of 7/47ths. The fuel element of mileage will typically be around 10 to 14 pence per mile, assuming the employer pays at least this much in mileage. This VAT element is 1.5 to 2 pence per mile, which sounds small, but over 10,000 miles is £200 per driver. It is a clear case of an area where not saving the pennies will certainly cost pounds!
Why the change?
The European Courts of Justice decided that a mileage allowance breaks two fundamental rules for a VAT reclaim. Firstly, the chain of supply by which one VAT registered person / company purchases VATable goods and services from another VATable person / company, which is necessary for VAT paid to be deducted, since mileage is reimbursed to the employee as recompense for purchases of fuel. In addition, as there is no taxable supply, mileage being merely an allowance for business travel, no VAT invoice can be provided to the employer and, without this, no VAT recovery can take place.
Ashley Whittaker, CEO of GlobalExpense says: We’ve been expecting this outcome for a while as the European Commission took and won a similar case against the Netherlands several years back. However 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.
GlobalExpense believes that it is likely to cause a backlash amongst the UK business community, and estimates that over 2,000,000 employees incur monthly expenses and that each year UK businesses are paying out over £12 billion to them in expenses. GlobalExpense estimates that if the UK VAT regime becomes as restrictive as most European countries to the recovery of VAT on expenses, then the potential cost to employers could rise to over £1billion per annum in lost VAT. That’s £45 per month for every employee claiming expenses!
Ashley adds: Left uncorrected by the UK Government, this judgement will mean that employers in the UK need to plan now and make some fundamental changes to their expense management processes. In the first instance employers need 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.
Financial Directors need to ensure their company has robust systems which are integrated with the systems of their corporate credit card provider to allow automated recovery of incorrectly incurred card spend. Businesses cannot be complacent, failure to act will mean they miss out on recovering substantial amounts of VAT.
Back to news index
Contact us
Phone us on
08717 40 80 10
