European courts clarify VAT rules

Date: 14th July 2008

A decision by the European Court of Justice could stop businesses rounding down their VAT liabilities.

Ruling in a case involving Dutch supermarket chain Albert Heijn, the European Court of Justice said that individual governments should be allowed to decide whether to permit businesses to choose how they calculate VAT.

The case had centred on the supermarket, which had decided to claim VAT on individual items rather than a whole transaction. By rounding down every item, the firm had sought to reduce its taxation liability.

However, the European court ruled that individual member states could decide if the practice was permissible, meaning that the Dutch government was within its rights to prevent the practice.

Website accountancyage.com reported that the Topps Tiles case of 2006 had already established that businesses in the UK should round VAT both up and down on groups of goods.

In a statement commenting on the European decision, HM Revenue & Customs said: "HMRC welcomes this ECJ ruling which clarifies the correct treatment of VAT included in tax-inclusive prices. HMRC's existing policy and published guidance are correct and therefore remain unchanged."