UK: Road Tolls Set To Increase After European Court VAT Ruling Tax

VAT is set to be levied on privately operated road and bridge tolls following a judgement by the European Court today that the UK is in breach of its obligations under European law in treating tolls as exempt from VAT. Assuming operators pass on the full costs to motorists, a car driver currently paying £4.20 on the Severn Bridge, for example, will be faced with an increase of almost 75p.

The overall cost to the UK could be as high as £50m, as it will now have to pay over the European Commission's share of the undercharged VAT back to 1994.

Tony Lynne, Head of Indirect Tax, KPMG, said: 'Toll bridges and tunnels are operated by a range of different bodies, including local authorities. This decision will affect the private sector operators who will now need to consider whether the terms of the contract under which they collect tolls allow them to increase their prices to add VAT. If not, contracts will need to be renegotiated. In some cases public subsidies may need to be increased to compensate the operator for changes to expected profits.'

Operators will also be faced with the need to supply VAT invoices to drivers, with all the compliance problems that follow, such as changes to accounting systems, tills and collection methods.

Tony Lynne added: 'Where new projects are under discussion, negotiations may need to be reopened to allow for VAT to be brought into the calculations.'

Hauliers will have to consider compliance issues such as how their drivers will collect VAT invoices. Whilst individual amounts will be small, the total amount of VAT for a large haulier will be substantial. For most hauliers there will be no actual VAT cost, as they will be able to reclaim VAT as long as they hold the necessary evidence.

Although the Commission will be able to collect its share of underpaid VAT from April 1994 from the UK treasury, Customs and Excise will not be passing this cost on to the operators.

The Commission also took cases against France, Ireland, the Netherlands and Greece which all treat tolls as free of VAT. Similar judgements were given for all countries, but it is only in France, Ireland and the UK that private sector operators are involved.

Tony Lynne concluded: 'The fact that three disappointed EU governments will have to change the relevant law in this area is another telling indication of how European Court decisions are increasingly influencing tax law in each member state. The Court is a bigger driver towards tax harmonisation than anything proposed by the European Commission. VAT has always been a European tax but it is becoming equally the case for direct taxes as well.'

Head of Indirect Taxes, KPMG

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