Tax Case - VAT on employee expenses

Companies may no longer be able to reclaim the VAT on business expenses paid by their employees, as a result of a recent ruling in the European Court of Justice.

The European Commission brought a case against the Netherlands, saying that Dutch law which allowed the deduction for the purposes of VAT of a certain amount of an allowance paid by an employer to an employee using his own vehicle for business, did not comply with the Sixth Directive.

The Court said that the Sixth Directive defined who was liable to pay VAT and the scope of the right to deduct tax. It excluded VAT liability on the employee's pay due under an employment contract. However, a business could deduct VAT when goods or services supplied by another taxable person have been used for the purposes of its taxable transactions. The Court ruled that an employee acting for his employer did not have the status of a taxable person, even when he used his own vehicle for business purposes. Furthermore, the fact that the employee uses his car for work, did not constitute a supply to the employer. The employer, in reimbursing the employee for the use of the car, was paying not only for relevant fuel, but also towards the depreciation.

The fact that there was no invoice, which is mandatory for making a deduction, added to the absence of a supply between taxable persons.

The United Kingdom supported the Netherlands in its case, and as a result of the European Court's ruling, United Kingdom businesses could also face a major increase in costs where they pay employees a mileage allowance.

(Commission of European Communities v Kingdom of the Netherlands Case C-338/98, European Court of Justice, 8 November 2001.)

Issue: 3833 / Categories: