In a decision likely to impact on UK businesses, the European Court of Justice has ruled that Dutch companies may not claim back VAT on costs employees incur when using their cars for business purposes.
Last month's judgment in the European Commission's favour could lead to VAT being lost on all employee expenses across the European Union.
Although the ruling will have no immediate effect on UK business, there are fears that the UK could eventually be forced to change its legislation or also face court proceedings, ultimately leading to a huge rise in companies' VAT costs.
However, Customs said it was not aware that the Commission was bringing any case against the UK, and emphasised that the ruling in the Netherlands case had been made in respect of Dutch law, which was very different from the UK's. Nevertheless, Customs admits it would be 'foolish' to ignore the case, and is looking into the ruling's potential implications.
'The ECJ made the point that the result may not appear fully consistent with certain VAT principles and that it was for the legislature to provide an appropriate basis for allowing deduction,' a Customs spokeswoman explained. 'We're going to pursue this with other EU member states and the Commission.You never know what's going to happen, but it's prudent to begin discussing any potential impact with UK businesses and their representatives.'