BRITISH fleets could face a sharp increase in VAT costs if a European court case goes the wrong way.

The case involves the right of companies to recover VAT on expenses incurred by employees when driving their own cars on business. It is currently before the European Court of Justice, and could have huge cost implications for companies offering drivers cash alternatives to the company car.

A preliminary judgement by an ECJ Advocate General ruled against the Netherlands, and the ECJ generally follows the Advocate General's opinion.

The European Commission opposes VAT laws that allow businesses to recover VAT when they reimburse employees for business expenses, and has taken the Netherlands to court over a similar case.

UK VAT laws are similar to Dutch rules, so an unfavourable ECJ verdict would force the British Government to change UK VAT regulations.

The ramifications of the case could extend to hotel accommodation and business meals where an employee pays and is then reimbursed.

Frank Hartley, VAT partner at business and financial advisors Grant Thornton, warned: 'The outcome of this case could have a massive impact on any business affected, particularly those with a mobile workforce. If the Advocate General's view is followed, this will be a real blow for British businesses both in terms of the additional VAT and the disruption to established systems. Businesses may have to take steps so the employer is seen to be accepting supply.'

Corporate and fleet purchasing cards where the invoice is sent directly to the employer may be one solution.

But Hartley said firms should still be able to recover VAT on fuel pay-and-reclaim systems if they use the fuel scale charge.

The ECJ is not expected to reach a verdict for three to six months.