Following infringement procedures brought by the European Commission against the UK Government, the European Court of Justice (ECJ) has ruled that the VAT (Input Tax) (Person Supplied) Order 1991 is incompatible with community law.

This statutory Order provides the authority for employers to deduct the VAT incurred on road fuel purchased by employees when it is treated as having been supplied to the employer for the employer's requirements. The amount reimbursed to employees may 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 EC brought proceedings against the UK Government on the basis that

• the Sixth VAT Directive states that, in order for a taxable person to deduct VAT, the taxable person must hold an invoice, and
  
  
• only VAT on goods and services supplied to a taxable person for the purposes of his own transactions may be deducted.

However, the statutory Order allows 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 is possible, therefore, for an employer to deduct VAT on fuel used by employees for their private purposes.

The ECJ's decision is, therefore, that the statutory Order is incompatible with community law because it does not make the right to deduct subject to the condition that the fuel purchased by the employee should be used solely for the purposes of the employer's taxable transactions.

The UK Government will, as a result of this decision, have to bring the statutory Order into line with the VAT Directive. As it is normal for employers to distinguish between the business and private use of fuel purchased by employees on the basis of mileage records, this will create serious problems for employers. It would appear that, to comply with the VAT Directive, employers will only be able to deduct input VAT if

• the purchase is supported by a VAT invoice, and
  
  
• the fuel charged on the invoice is used solely for the employer's taxable transactions.

Unless a vehicle is used solely for business purposes, it may be impossible for employers to meet those requirements.

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...back to 17 March 2005


Sources:
CVRIA