BRITISH businesses could be thousands of pounds a year worse off each a year after a European Court decision on VAT.

The EC advocate general asked the court to declare the UK's VAT system illegal.

The point it had picked up on was when employees buy fuel for company cars and put the money on expenses.

At the moment British businesses can claim the VAT back on those expenses at 17.5 per cent.

However, the EU's sixth VAT directive says VAT can only be claimed back when both parties are VAT registered.

An employee is not VAT registered, and so from now on the VAT claim will not be allowed.

And although the principle applies most to fuel for company cars, other expenses like paying for hotels could also be affected.

Fleet management and leasing firm Arval, which is based in Windmill Hill, Swindon, says the decision will have a major financial impact on British business.

It says that a company with a 100-strong fleet, with drives that cover on average 15,000 miles a year, will now not be able to claim back about £23,000.

When added up across the country, it comes to tens of millions of pounds.

The only way round it is to use a fuel card or a company credit card but introducing such schemes is a cost in itself.

Mike Waters, head of Arval's market analysis, said: "Companies will either have to overhaul their fuel procurement systems, by introducing a purchasing mechanism that allows for billing to be made in the name of the employer or they will be unable to continue to reclaim the VAT on fuel.

"The decision could also potentially impact against the UK for other business expenses, such as hotel accommodation, which is traditionally paid for by the employee and then reclaimed."

Bristol South MP Dawn Primarolo, the Government's Paymaster General, has said that the ECJ was being inflexible and impractical and that the Treasury was deeply disappointed by the judgment.

"We will consider what steps can now be taken through legislation and practice to maintain the right of businesses to reclaim all the VAT relating to their business use of fuel," she said.