A RULING by the European Court of Justice on a VAT technicality could cost UK companies billions of pounds, it is claimed.

At the moment, UK firms are allowed to reclaim VAT on any expenses claimed by their employees, provided there is evidence of business use.

These are the sort of expenses claimed by all employees from time to time, including use of private phones to make a business call and mileage allowances for fuel used on business journeys. The case, brought by the European Commission, found against the Netherlands government on the specific issue of VAT recovery on employee mileage allowance claims.

The Netherlands rules are very similar to those in the UK and a change is expected to follow the decision.

Dermot Gaffney, Manchester-based Indirect Tax partner at KPMG, commented: "While Customs and Excise have said the change will not be retrospective, the costs will be huge.

"The individual amounts in question may seem small, but just about all one million VAT-registered businesses in the UK will be affected.

"For example, a businessman driving 10,000 miles a year will reclaim about 12p a mile or £1,220 a year. The employer presently reclaims £180 of this as VAT.

"A medium-sized firm could have as many as 500 employees claiming mileage allowance, which will leave the company with an additional annual £90,000 bill under the new rules."

He went on: "And don't forget all the other expense claims as well, such as calls from mobiles, hotels for business trips, meals, taxis and other minor purchases such as stationery.

"Businesses will try to minimise the effects by changing employee claims' procedures, but this will take time and be a costly process."