THREE weeks ago, UK Customs & Excise lost a major court case in the European Court of Justice which threatens to leave UK business unable to reclaim millions of pounds of VAT incurred on business mileage. As a result of the court's decision to uphold the 6th VAT Directive, UK domestic law could be amended later this year.
What's this got to do with me? I hear you cry. But the construction industry is a very heavy user of fuel in both cars and vans. A construction company running a fleet of 500 cars, all averaging 15,000 miles a year, and operating a pay and reclaim system stands to lose a staggering £115,000 a year unless it overhauls its fuel procurement systems.
Critically, businesses will lose this privilege unless their fuel procurement systems comply with the 6th VAT Directive.This is not just another piece of 'gold plated' legislation from the European Union that will filter through to the UK eventually.The legislative clock is already ticking and the recent European Court decision against HM Customs & Excise means mounting pressure for UK law to be amended. In 2001, the EC won a similar case against the Netherlands. In this instance, the Dutch Government was given nine months to fully comply with the ruling.
Currently, many businesses, including construction firms, use a business expenses pay and reclaim system, whereby company car or van drivers purchase fuel with their own funds then submit fuel receipts and business mileage figures to their finance departments before they are reimbursed by the company.Under this system, the company reclaims the VAT on the fuel at 17.5 per cent.
If UK law is amended to accommodate the European Court ruling, companies will no longer be able to reclaim the VAT on fuel transactions by using a traditional pay and reclaim system. In order to maintain this right, businesses will need to ensure that all transactions at petrol forecourts are between two parties registered for VAT and that there is a VAT approved invoice in the name of the employer.This can only be achieved via a purchasing mechanism, such as fuel card, or corporate credit card which allows for billing to be made in the name of the employer.
For many contractors travelling to sites across the UK, fuel cards are not a new phenomena.Many large construction firms already provide their contractors with fuel cards or fuel vouchers. But many fleet car drivers working for construction firms are still asked to dip into their pockets and buy business fuel before reclaiming the money.This procedure will have to change immediately or construction companies will face significant VAT losses.
Ultimately, businesses could have two choices to enable them to continue to recoup all VAT on fuel.They could either provide van and car drivers with fuel cards or corporate credit cards. Finance directors need to ask themselves now whether they are prepared to let all drivers loose with a corporate credit card and its high spending power in any retail environment.
The other option open to construction firms is to arm all drivers, from contractors to marketing managers, with fuel cards.Fuel cards allow fleets to be able to manage fuel costs and are VAT registered, enabling business to continue to reclaim VAT on fuel.