Date of issue: 14th May 2005

FIRMS UNABLE TO CLAIM VAT ON EMPLOYEE EXPENSES

Chartered accountants Clement Keys, Birmingham is warning that possible changes to VAT legislation could make it impossible for businesses to reclaim VAT on a wide range of employee expenses.

Under the UK's existing VAT regime, firms which reimburse their employees for the cost of fuel purchased for business travel purposes can reclaim the VAT element.

However, the European Court of Justice (ECJ) says the UK's rules are 'not compatible' with the European Community's sixth directive, which states that VAT on goods and services may only be recovered where there is a valid invoice made out to the employer and where the supplies are received specifically for the purpose of the employer's business.

The ECJ argues that reimbursement of road fuel via a mileage allowance or a petty cash receipt for the actual amount paid, does not comply with EC law.

"This case follows a successful ECJ ruling against the Netherlands Government in 2001 and our concern is that the EC's decision could apply to all purchases made by employees on behalf of their employers, including subsistence and hotel bills," says director of VAT services Steven Simmonds.

Businesses could find themselves very much out of pocket because they will be unable to reclaim the VAT on any business expenses where it is the employee rather than the employer that is billed."

To comply with EC law businesses could set up fuel account cards, make provision for all hotels, flights and car hire to booked centrally through a specific department or issue senior employees with company credit cards.

"The newly formed H M Revenue and Customs (HMRC) department says businesses should continue to reclaim VAT on employee expenses under the existing rules while the Government considers its position," adds Steve Simmonds.

"Our advice to SMEs is to take a look at your options but delay the introduction of any
new arrangements until the HMRC issues further guidance on how the ECJ judgement is to be applied."