UK construction firms are set to lose tens of millions a year in reclaimed VAT after a European Court of Justice decision, according to Arval, part of French bank BNP Paribas.

The ECJ has declared that the UK was in violation of the European VAT directive. The decision means that UK businesses will be unable to reclaim VAT on business mileage expenses.

The directive states that VAT can be reclaimed only if the transaction takes place between two VAT-registered organisations.

Many UK firms allow employees, who are not VAT-registered to buy fuel before the business claims back the VAT. When the law changes, companies will have to overhaul their fuel procurement systems so that the employer is directly billed.

Mike Waters, head of market analysis at Arval, said: “The decision could also potentially affect the UK for other business expenses, such as hotel accommodation, which is traditionally paid for by the employee and then reclaimed.”