Recovery of VAT on costs reimbursed to employees

United Kingdom
The European Court of Justice has handed down an important judgment concerning the extent to which an employer is entitled to recover as input tax VAT on staff paid costs reimbursed by his employer. The case itself concerns the recovery of VAT on costs incurred by an employee on the use of a private vehicle for the purposes of the employer's business but the principles laid down by the ECJ are likely to be equally applicable to other staff paid costs. It is understood that there is likely to be another case (against the UK) that may clarify the position further.

The EC Commission brought proceedings against the Netherlands (Case C-338/98) for a declaration that, by allowing employers to deduct VAT on costs incurred by an employee for the business use of a private car (and reimbursed by the employer), the Netherlands had failed to fulfil its obligations under the EC Treaty. The ECJ granted the declaration, holding that Netherlands domestic legislation was in breach of Articles 17(2)(a) and 18(1)(a) of the EC Sixth Directive.

The EC Commission put forward 3 main arguments. First, that the goods/services were not supplied to the employer but were supplied to the employee and it is only the recipient of a supply that is entitled to recover the related VAT. Secondly, the goods were not used exclusively for the purposes of the employer's business. Thirdly, there was no VAT invoice addressed to the employer.

The ECJ accepted the Commission's first argument concluding that the supply was made to the employee (and not the employer). The Commission's second argument was not addressed by the ECJ and it has therefore been left open for the Commission to argue in a future case that expenses incurred by an employee ostensibly for business purposes do have at least an element of private use (and are therefore not wholly recoverable). The Commission's third argument was also accepted by the ECJ.

Implications

1.

The ECJ decision represents a declaration that Netherlands domestic law is in contravention of EU law. It does not immediately affect UK law and accordingly until such time as Customs & Excise amend UK domestic legislation the current law and practice in the UK will continue to apply.

2.

Nevertheless, it is understood that proceedings in the ECJ will be brought against the UK for a declaration that UK domestic legislation concerning the VAT treatment of staff paid costs is contrary to EU law. This decision lays down a fairly clear marker for how the ECJ is likely to rule.

3.

There is nothing in this case that would deny an employer input tax recovery for VAT on supplies of goods and services supplied to the employer. If UK domestic law is amended in the future, employers may therefore have to put in place alternative procedures for acquiring goods and services that to date have been acquired by the employee as principal (and for which the employee is subsequently reimbursed). It may be necessary for the employer (rather than the employee) to contract with the supplier. For example, in the case of hotel bookings, the booking may need to be made in the name of the employer with the hotel issuing a VAT invoice addressed to the employer. Where an employee contracts with a supplier he would need to do so as agent, in the name of his employer and with his employer's authority.

If you would like further information, please contact

Mark Nichols, phone: +44 (0)20 7367 2051

e-mail: mark.nichols@cms-cmck.com

Richard Croker, phone: +44 (0)20 7367 2149

e-mail: richard.croker@cms-cmck.com

Mike Boutell, phone: +44 (0)20 7367 2218

e-mail: michael.boutell@cms-cmck.com