Councils in parking fee setback

Local councils across the UK have been dealt a blow in a long-running legal battle over off-street parking tax.

Nearly £130 million could be at stake in a fight with HM Revenue and Customs (HMRC) over VAT the councils claim was wrongly paid out under EU law.

But in a test case involving four councils, EU judges said they should pay VAT if an exemption gave them unfair advantage over private firms.

The final outcome could impact on what motorists pay for off-street parking.

Off-street parking refers to multi-storey car parks and those attached to shopping centres, for example.

The test case was brought by four the Isle of Wight Council, Mid-Suffolk District Council, West Berkshire District Council and the South Tyneside Metropolitan Borough Council.

They were selected because they represent the different types of local authorities in the UK, and their claims for VAT refunds on parking charges amount to a total of £1.6 million.

But European judges rejected their argument that the issue should be decided on a case-by-case basis to see if each local authority's off-street parking regime did or did not distort private sector competition.

The final verdict now rests with the UK's High Court, but the European judges' ruling increases the chances that HMRC will win the case and councils will have to carry on levying - and paying - VAT on their off-street parking services.

But if they are excused from paying VAT on off-street parking ticket sales, their profits could be increased by more than 40%.

Under EU rules any supply of goods or services by a "taxable person" is subject to VAT.

The rules say public authorities are not considered "taxable persons" in respect of revenue-raising activities they carry out as public authorities - unless there is a risk of a "significant distortion of competition" with the private sector.

Historically, local authorities in the UK have accepted they pay VAT on off-street parking income.

But in 2000 the European Court ruled in a Portuguese case that off-street parking provision by a public authority was not necessarily subject to VAT, triggering demands by 127 UK local authorities for repayment from HMRC of £129 million.

The claims were refused by HMRC but on appeal, the VAT and Duties Tribunal examined the four test case regions individually and ruled they should be exempt from VAT on off-street parking.

HMRC appealed to the High Court, arguing the examination should not be carried out on a "authority by authority" basis but on a general nationwide assessment of the potential impact on the private sector parking operators.

The High Court sent the issue to Luxembourg for ruling on what the EU law means.

The case is now set to return to the High Court, and as the European judges pointed out, if public authority parking revenue becomes VAT exempt, the remaining three-quarters of the UK's local authorities are likely to add their claims to those already lodged.

BBC