State's canteen VAT error to cost €200m

Employers are in line for a tax rebate of up to €200 million after the European Court of Justice ruled against the Revenue's interpretation of VAT rules on canteen food sales.

The decision will cost the State between €10 million and €20 million in lost tax revenue a year in the future, according to leading accountants.

Companies offering canteen services will also be able to claim back excess VAT incorrectly charged by the Revenue in the past as a result of the case involving a Swedish hotel group and the local tax authorities.

Mr Aidan Fagan, indirect tax partner at Deloitte, says the case revolved around the VAT due on subsidised sales to staff at an in-house canteen run by the company. Swedish tax authorities insisted that VAT was due on the full cost of the products sold - the actual price paid plus any subsidy - while the hotel claimed it should be liable for VAT only on the actual price paid.

The Irish Revenue's position, along with those of several other European states, was the same as that in Sweden. "The judgment clearly states that there is no power under the EU 6th Directive or in domestic legislation to hold you liable to VAT other than on the price paid in these circumstances," said Mr Fagan.

Employers who have outsourced their canteen operations may also be eligible for rebates depending on the terms of the contracts they have signed with their service provider.

KPMG VAT partner Mr Terry O'Neill says that, even where companies do not seek repayment of arrears, they will structure canteen contracts to ensure that they avail of the lower VAT charge going forward.

"The amount involved will be quite considerable for the Revenue," said Mr Fagan, whose firm previously won a battle with the Revenue on the same point.

At that time, the Revenue stated that the decision did not set a precedent and insisted that it was confident of its interpretation of VAT law. The Government cannot regularise the current practice simply by introducing amending legislation.

The European Court of Justice ruling states that only by seeking a derogation from the EU on the basis of preventing "certain types of tax evasion or avoidance" could countries legitimately assess VAT on canteen sales in the way that they have until now. No member-state has sought such a derogation.

Mr O'Neill said: "This is good news for employers operating subsidised staff canteens and will result in annual savings in excess of €200,000 for some of the larger employers."

Tax experts estimate that payment of arrears could cost the State up to €200 million, depending on the number of employers seeking rebates.

A spokesman for employer lobby IBEC said: "Any reduction in tax on business is welcome."

Last night, a Revenue spokesman said they had not yet had time to examine the judgment.