NEW regulations will soon close the lucrative loophole that has allowed leasing firms to trim their tax bills.

Expected to come into force next January, tighter EU laws covering cross border leasing will base VAT liability on the country where vehicles are used, rather than where they are purchased, revealed Ernst & Young director Alastair Kendrick at the Fleet News Europe Conference, in Brussels.

'A recent attempt to introduce new regulations failed because wording in the VAT Commission draft document proved to be wrong.

'But there is no doubt that another attempt will soon be made and this loophole is expected to be closed by January 1, 2006,' Kendrick told delegates at the conference.

He said the changes had been triggered by several high-profile cases involving vehicle sourcing from member states where VAT rates were more favourable.

Kendrick said: 'Before then, there will be more changes regarding VAT on business fuel. From March or April, it will no longer be possible to assume the level of business mileage and adjust VAT on that basis.

'Claims will have to be made on the basis of strict mileage records in future and I think many companies across Europe will now be going back to the drawing boards to find out how they can deal with keeping more accurate records in future.'