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
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.
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.
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
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
Mark Nichols, phone: +44 (0)20 7367 2051
Richard Croker, phone: +44 (0)20 7367 2149
Mike Boutell, phone: +44 (0)20 7367 2218