In March 2006, the European Court of Justice (ECJ) ruled that the VAT (Input Tax) (Person Supplied) Order 1991 was incompatible with community law. That Order provided the authority for employers to deduct the VAT incurred on road fuel purchased by employees when it was treated as having been supplied to the employer for the employer's requirements. The amount reimbursed to employees could be based on the actual amount paid by the employee when buying the fuel or on an amount calculated by means of a mileage allowance.

The statutory Order allowed employers to deduct VAT based on amounts calculated in respect of distance travelled, "whether or not including distances travelled otherwise than for the purposes of the business of the taxable person". It was possible, therefore, for an employer to deduct VAT on fuel used by employees for their private purposes.

The ECJ's decision was that the statutory Order was incompatible with community law because

1. it did not ensure that the VAT recovered related solely to fuel used solely for the purposes of the employer's taxable transactions, and
   
   
2. the employer was not required to hold a VAT invoice in respect of the fuel purchased.

In response to the decision of the ECJ, new Regulations have been made that replace the 1991 Order. The Value Added Tax (Input Tax) (Reimbursement by Employers of Employees' Business Use of Road Fuel) Regulations 2005 continue to allow employers to treat as input tax the VAT incurred by employees on fuel costs that are subsequently reimbursed by the employer. This may be done on the basis of the actual fuel cost or by means of a mileage allowance. The provisions apply to both company cars and to employees' own vehicles.

However, from 1 January 2006, the employer may only recover that part of the VAT on fuel that is used for the purpose of the employer's business and the employer must hold a VAT invoice in support of the claim for recovery. The invoice may be a full VAT invoice or a less detailed one.

These new requirements do not affect procedures whereby employees use fuel cards or credit/debit cards provided by their employers to obtain fuel, or can charge the cost to an account operated by their employers at a filling station. They apply only to the situation where employees buy their own fuel and then claim reimbursement.

As set out in the Regulations, the following conditions must be met:

1. the fuel must be delivered to and paid for by the employee
   
   
2. in so doing, the employee must be acting in the name of and on behalf of the employer
   
   
3. the employee must obtain a VAT receipt, either a full VAT receipt or, if relevant, a shorter retailer's invoice
   
   
4. the fuel must be used by the employee, in whole or in part, for the purposes of the employer's business
   
   
5. the employer must already have agreed to reimburse the employee's costs
   
   
6. where all of the fuel is for the purposes of the employer's business, the reimbursement must be made by payment of the actual cost of the fuel
   
   
7. where only part of the fuel is for the purpose of the employer's business, the reimbursement must be made by either
   
   
   • payment of an amount determined by
     
     
     • the number of miles travelled by the vehicle in which the fuel is used for the purposes of the employee's business, and
       
       
     • the cylinder capacity of the vehicle; or
       
       

   • payment of the actual cost of the fuel where the employer uses the VAT road fuel scale charges and pays the appropriate output tax.

The term "purposes of the employer's business" is limited to use of the fuel for those purposes by the employer in making onward taxable supplies.

VAT Public Notice 700/64 Motoring expenses is to be updated to reflect these changes and it is to be hoped that HMRC will provide guidance on the evidence that employers should retain to demonstrate that the stricter conditions have been met. In particular, the requirement that the employee must be acting 'in the name of and on behalf of' the employer sounds very much like the "litany" that must be used in the context of Class 1 NICs when employees are using a credit card to purchase fuel.

...back to 29 December 2005


Sources:
The Value Added Tax (Input Tax) (Reimbursement by Employers of Employees' Business Use of Road Fuel) Regulations 2005
Explanatory Memorandum
VAT Business Brief 22/05
Motoring expenses

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From 1 January 2006, all newly-registered cars, including those with diesel engines, have to meet the European Euro 4 emissions standards. These standards reduce by a half the previously permitted diesel particulate and nitrogen oxides emission levels permitted by the earlier Euro 3 standards.

As a result of the introduction of the Euro 4 standards, the UK government has reinstated the 3 percentage point premium on the car benefit charge for diesel cars from 1 January 2006. All cars registered from this date but before 6 April 2006 will be taxed as if they were petrol cars for 2005/06 but will be taxed at the higher rate for 2006/07.

On 21 December, the European Commission put forward new proposals for a "Euro 5" standard, to take effect at the earliest from mid-2008. The proposals target diesel cars in particular, requiring an 80% reduction in particulates, from 25 mg/km down to 5 mg/km. This would require the fitting of particulate filters rather than changes in diesel engine design.

Both diesel and petrol cars would be required to reduce nitrogen oxide emissions by up to 25%. In addition, a 90% reduction in particulates will be set for diesel vans.

The UK government, at the time of the Pre-Budget, announced that it was already looking at the proposals with a view to using the company car taxation rules to encourage take-up of vehicles meeting the new standards ahead of the eventual formal requirement.

...back to 29 December 2005


Sources:
Clean cars: Commission proposes to reduce emissions

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