Britain faces defeat in EC over VAT rule

THE Government may have to repay millions of pounds in tax if the European Court upholds a judgment that UK law on VAT is at odds with Brussels writes Russell Hotten.

Customs and Excise faces an avalanche of claims by companies that may have been wrongly charged VAT on commercial property leases. Since 1989, money paid by a landlord to a tenant to give up a lease before it expires has been subject to VAT. But Lubbock Fine, a firm of City accountants, refused to pay pounds 110,000 in VAT on a sum it received for leaving its offices seven years early, and took its case to Europe.

The EC Advocate-General has recommended to the European Court that the UK position is unlawful. The court will rule in the autumn, but rarely ignores the Advocate-General's advice. Experts believe the Chancellor, Kenneth Clarke, will be forced to make a change in his November Budget.

Customs, having argued in 1989 that imposing VAT was compatible with EC law, is left looking like a 'bungling amateur', said one source.

'It is a nice irony that everyone except them will be able to appreciate.'

Alan Cushnir, a partner at Lubbock Fine, said: 'If, as expected, the final ruling goes in our favour, any registered trader who had protected their position correctly should be able to recover any tax they may have paid on proceeds from (a lease) surrender.'