FLEETS are facing a Catch 22 dilemma over EC plans to outlaw the 'pay and reclaim' system often used for providing drivers with business travel fuel. Many drivers use their personal cash or credit cards to buy fuel for business journeys and then claim back the cost from the company, with the firm claiming back VAT on the fuel cost. Now, companies fear they will soon be hit by massive tax bills because most European legislation demands that deductions of VAT are only possible on goods supplied directly to the employer, where the invoice is made out in the company's name.

The EC is pushing for the UK to fall into line with the rest of Europe and, as under 'pay and reclaim' the fuel is supplied to the employee and the bill is made out in their name, VAT could not be reclaimed if the EC system was imposed. To avoid the problem, companies could decide to move to fuel cards, which are centrally billed with the company's name on the invoice, and VAT can be reclaimed on business use.

However, there are differing views on whether moving to fuel cards will help firms stop fuel bills rising. Nigel Underdown, director of marketing at leasing and fleet management specialists Godfrey Davis, said: 'Losing the chance to reclaim VAT under the 'pay and reclaim' system can be expensive but it could cost just as much moving over to fuel cards in increased expenses from misuse, such as drivers refuelling private vehicles.'