An expected ruling this summer by the European Court of Justice (ECJ) could restrict UK companies' ability to reclaim VAT on travel expenses.
The Court is likely to back an opinion of the EC's Advocate General that the UK breaks EU VAT law in the way it allows British companies to recover VAT.
British companies are currently allowed to recoup VAT even if the receipt is made out to one of their employees, rather than to the company. The ECJ ruling is likely to stop this.
In an assessment of the situation, consultants KPMG have told the Royal Bank of Scotland (RBS): “It is likely that the Court will agree with the Advocate General.
“If so HM Customs and Excise will be forced to amend UK VAT legislation and the ability of corporates to recover VAT on T&E type expenditure will be restricted.”
Among areas most likely to be affected are fuel costs for business trips, telephone costs, car hire, hotels and meals - all areas where bills are usually made out to the employee rather than the company.
“It is probable that VAT recovery based on the fuel element of mileage allowance will have to be abolished in the wake of the final decision of the Court.
“Similarly VAT recovery on transactions where the invoice is made out in the name of the employee, rather than the employer, is unlikely to be permitted in the future,” KPMG said.
Duncan Kennet, business development manager commercial cards for the RBS, said: “How the new rule is interpreted is up to Customs and Excise and they have said nothing so far but it is going to affect travellers who buy fuel, stay at hotels ands buys meals.”
He estimated that firms stood to lose “quite a lot” if the law change went ahead.
But he said VAT could still be reclaimed after the ruling if travellers issued their travellers with company credit or debit cards which would enable the transaction to go straight into the company's books.
KPMG said that after the Court's decision, there was likely to be a period of consultation with affected business and possibly an approach by Customs to the EU.
Any changes are unlikely to come in to force before 2006 or even 2007.