UK: Deloitte Weekly VAT News - Week ended 11 March 2005

VAT on fuel – European Court declares UK system for VAT recovery to be illegal

Employers paying an amount per mile for business mileage and recovering an element of this allowance as VAT are facing a 12-15p increase in the cost of every litre of fuel used by their employees after the ECJ decided that EU law does not allow VAT reclaims to be based on mileage allowances. Customs will now consult on what to do, but any business that pays a mileage allowance and does not have VAT invoices to evidence the recovery of the VAT will need to address how it deals with the issue, especially if considering any systems changes.

Abbey National’s earlier case demonstrated that sub-contracted investment management of Unit Trusts and OEICs (and probably Investment Trusts who are claiming similar treatment) is VAT free and their second case, heard by the ECJ on 10 March, is seeking similar treatment for sub-contracted trustee, depositary and administrative services. The ECJ’s Advocate General is expected to deliver her opinion in the case in a few months, but no date for this has been set.

We hear that some agencies are being targeted by bogus businesses taking advantage of the frequent use of sub-agents to issue invoices with VAT that is not then paid to Customs. Customs are currently visiting agencies that fit the profile to request details of every purchase invoice from their suppliers and on finding any bogus invoices, assessing for the VAT involved. However, if the VAT is disallowable the whole invoice has probably been paid and the business may have paid for goods and services that do not exist. Deloitte’s D&Tect software can identify instances of this kind and we can advise on corrective action.

Customs are continuing to pursue companies that claim back VAT on "personal" phone calls, particularly those from "business" mobiles. They are looking at phone bills to identify calls, text messages, etc made outside business hours and disallowing the VAT on not only those calls but also calls made during working hours to those numbers. This is leading to substantial VAT assessments, interest and sometimes penalties. Businesses should ensure that they have robust policies and audit trails in place to deal with the non-business use of phones, particularly mobiles. For more information, please speak with your usual VAT contact.

Gordon Brown delivers what is expected to be his last budget before the General Election on Wednesday 16 March. As usual, there will be a special edition of the Weekly VAT News covering any interesting VAT developments. Comment will also appear on our special Budget Website

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