BRITISH businesses lost a tax rebate on staff mileage expenses worth an estimated £250 million a year yesterday when the European Court of Justice declared it illegal.

The ECJ ruled that a British law that allows employers to claim back VAT on fuel charged to expenses by their staff was incompatible with European Union law.

It stated that the British system of car travel allowances, where expenses are calculated on a cost-per-mile basis, did not guarantee that employees were using the fuel for work purposes. The lack of transparency meant that EU rules could not allow firms to reclaim the VAT on fuel, currently worth about 16 pence for every litre of petrol, from the Government.

The judgment, in response to a two-year court action brought by the European Commission, leaves Britain’s mileage allowance system in limbo. It could force firms either to create costly chargecards for staff to get round the law, or to lose the rebate. Peter Jenkins, head of indirect tax at Ernst & Young, the accountancy firm, said: “This is another example of bad rules overtaking good practices.”

Dawn Primarolo, the Paymaster General, said that the ECJ was being “inflexible and impractical” and that the Treasury was “deeply disappointed” by the judgment. “We will consider what steps can now be taken through legislation and practice to maintain the right of businesses to reclaim all the VAT relating to their business use of fuel,” she said.

Ashley Whittaker, chief executive officer of GlobalExpense, which manages expenses for clients such as J Sainsbury and WH Smith, estimated that business stood to lose £250 million in reclaimed VAT every year.

Companies might be able to introduce credit cards for their employees to use when buying fuel, as these would not fall foul of the ruling, Mr Whittaker said. But the compliance costs would be much greater than under the current system, adding a large burden to small businesses with large travel expenses.

It was up to the Government to try to amend the 1991 law in line with the ruling. “Customs and Excise have said that they will be quite business friendly but you never know what that means when you have got a Chancellor who’s strapped for cash,” Mr Whittaker said.

A Treasury spokesman said yesterday that the Government did not believe the ECJ would extend its ruling on fuel rebates to other expenses.

“They themselves have said that the comparison is not there between fuel and other costs,” he said.

HOW MILEAGE SCHEME WORKS

Employers reimburse staff costs at a fixed rate and reclaim VAT. For example:

• Company pays employee 40p per mile. Of that, 12p is deemed to relate to fuel costs. Of that, 1.8p is VAT, which company can reclaim
• Total saving for British business is an estimated £250 million a year
• Under the ECJ ruling, companies can no longer reclaim VAT because fuel is not guaranteed to be used for business purposes

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