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Commercial Angles' Newsletter - October 2001

VAT on Employees' Expenses

A case currently before the European Court of Justice (ECJ) could have a significant impact on UK businesses by prohibiting employers from reclaiming VAT on employees' expenses. In European Commission v. The Netherlands (Case C-338/98 ) the Commission is contesting the Dutch practice of reclaiming part of the VAT incurred by an employee who uses his private car for business purposes. However the details of the case, http://curia.eu.int/jurisp/, are less important than the principles underlying the prosecution's viewpoint.

The argument put forward by the Advocate General Mrs.Chistine Stix-Hackl is that if an employee purchases goods or services on his or her own account then the chain of VAT deductions is broken, thus preventing the employer from claiming the VAT as part of the business's input VAT. If this argument is accepted by the European Court of Justice the ramifications would be very wide.

Under current UK VAT practice, employers are allowed, by concession, to reclaim VAT on employees' expenses. This particularly affects employees who work from home, or who travel frequently on business and pay for their travel and accommodation or telephone expenses themselves. Under the Advocate General's argument, only goods and services supplied directly to the business would be allowable as input VAT.

The ECJ decision may not be announced for several months and would not have retroactive effect beyond May 2001. However the amount involved could be £50 to £100 per month per employee submitting expense claims in some cases and could mount up to a significant sum over a year.

Ways in which businesses could minimise the potential impact include:

issuing fleet purchasing cards for vehicle expenses to employees.
issuing corporate credit cards to employees who travel frequently.
installing separate business telephone lines in the homes of homeworkers.
making hotel reservations and fares in the name of the business on behalf of employees.
issuing purchasing cards or vouchers to employees for certain categories of expense.
opening more accounts with suppliers and authorising certain employees to receive goods or services on the accounts

Articles from previous newsletters