Car companies’ tax boost under threat

Date: 29/10/1998

By Chris Johnstone

CAR-LEASE companies' hopes of windfall gains and car manufacturers' expectations of higher sales as a result of proposed European Commission tax changes appear in danger because some governments fear they will lose too much revenue.

Both sets of businesses have been looking forward to benefiting from Commission proposals to harmonise national rules for reclaiming value added tax as part of a wider bid to simplify the EU's settlement system for VAT refunds between countries.

If the proposals are approved by member states, governments would be prevented from banning lease firms from reclaiming VAT on the purchase of cars for their business - a restriction which has hampered the development of the lease-car market in some countries.

France, Spain, Denmark, Sweden, Ireland, Portugal, Greece, the UK and Finland do not currently allow such tax deductions, while some other member states offer extremely generous concessions. Germany, for example, allows a 100&percent; deduction of VAT for its car-lease companies.

European car manufacturers' lobby ACEA is supporting the Commission proposal to allow car firms to reclaim at least half of the VAT on car purchases. “French manufacturers in particular have been very keen for this change in the deduction rules to be adopted. It could be an important boost for business,” said a spokesman.

However, governments are baulking at the idea of the enormous loss of revenue they could face if the proposal goes through. “It could cost us a considerable amount of money, partly, because the lease-car business is so developed here,” said one British diplomat.

Such concerns explain why national experts have reacted coolly to the Commission plans, which also include proposals to iron out differences in the amount of VAT which can be reclaimed for company entertainment and accommodation.

Some have even warned that the tax harmonisation moves will have to be divorced from wider attempts to shake up the Union's VAT rules if the latter are to make any progress at all.

“The Commission has tried to piggy-back tax harmonisation measures on this proposal to simplify the VAT system, but it does not look as though this will work,” said a national expert.

The Commission came forward with its proposals for simplifying the VAT refund rules last June, arguing that the current system created confusion for business by failing to clarify where transactions should be taxed and where refunds could therefore be demanded.

“The lack of uniformity in the way the present system of VAT is applied means that the single market is segmented into 15 tax areas, thereby creating legal uncertainty,” said the Commission.

Its proposed 'simplification' would allow businesses to reclaim VAT on purchases made in any EU country. Decisions on what could be reclaimed would be based on the rules in the country where the company was based and not, as at present, on those in the member state where the purchase was made, with the cost of VAT refunds being met by the home country.

A new payments settlement regime between Union countries, which would be similar to the cheque settlement system between banks, would have to be created as part of this reform, with member states making six-monthly claims for the reimbursement of VAT payments paid to home-based businesses.

However, some countries are questioning whether the Commission's proposals would actually improve the situation much.

UK Customs and Excise has criticised the plan, claiming it would not iron out differences in tax treatment between EU countries and would mean a significant increase in its workload.