Local councils across the UK have suffered a setback in a legal battle over off-street parking charges.

Almost £130M is at stake in a case against HM Revenue and Customs (HMRC) over VAT, which councils claim was wrongly paid out under EU law.

European judges, ruling in a test case brought by four local authorities, decided last week that public authorities should pay VAT if exemption gave them an unfair advantage over private companies also providing off-street parking.

The judges rejected the councils’ 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 decision now rests with the UK High Court.

The councils – Isle of Wight, Mid-Suffolk District, West Berkshire District and South Tyneside Metropolitan Borough – brought the test case and were chosen as they each represent a different type of local authority. Their claims for VAT refunds on car park charges amount to a total of £1.6M.

The councils say they should be exempt from VAT because they are public authorities and are not, therefore, ‘taxable persons’ under a EU VAT Directive.

Historically, local authorities in the UK have accepted they pay VAT on off-street parking income. However, in 2000, the EU ruled in a Portuguese case that off-street parking provision by a local authority was not necessarily subject to VAT – prompting 127 UK local authorities to make claims for repayment from HMRC totalling £129M.

If they are excused from paying VAT on off-street parking ticket sales, their profits could be increased by more than 40%.
A spokesman for South Tyneside Council said: ‘We are working together with the other councils to put forward the best case which, if successful, will be of benefit to many councils throughout the country.

‘The matter now needs to go back to the High Court for it to make a decision in light of the European Court’s opinion. The parties will then have to consider the implications of that.’