TT77: VAT on employee mileage claims

February 22, 2006

Potential repayment of VAT…

In March 2005 we reported on a new twist in VAT law (see TT62).

This arose as a result of the European Court of Justice (‘ECJ’) handing down a ruling that UK law on employee-incurred expense payments was contrary to European law (essentially the UK allowed VAT registered traders to reclaim VAT incurred by employees on certain motor and subsistence expenses)….

To re-cap, the UK rules were declared wrong because:

  • the employee incurring the expense was not the VAT registered trader and the employer (the VAT registered person) was not being supplied directly;
  • the employers did not hold a valid VAT invoice (the 40p per mile Authorised Mileage Rate claim for using a private vehicle for business use or the Advisory Fuel Rate for claiming business fuel on a company car were not considered VAT invoices).

The UK Government had argued that not to allow employers to claim such VAT would be unfair and to make other arrangements would place a large administration burden on those employers.

However, whilst the case went against the UK, the ECJ did acknowledge that in principle the VAT registered trader should be allowed to claim back the VAT in some way.

As at March 2005 HM Revenue & Customs (‘HMRC’) had not decided on a response to the ruling and was still considering the matter. They advised that while the UK law remained unchanged, they could not rule out a potential repayment of VAT being due.

Barnes Roffe Topical Tips:

  • Advise employees to retain VAT petrol and diesel invoices to attach to their expense claims
  • Ensure that such receipts do not post-date the mileage expenses claimed
  • Review all claims back to 1 January 2006 – the date that the new regulations came into force.
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