Motorists face a possible 21 per cent rise in charges at local authority-run car parks after the State failed to convince the European Commission that such services should remain exempt from VAT.
The European Commission has begun "infraction proceedings" against the State over the issue. The Government now has the option of challenging these in the European Court of Justice or conceding the case and amending domestic VAT law.
At least one local authority says it has been told to expect a directive from the Minister for the Environment, Mr Roche, instructing it to start charging VAT.
However, the Department of Finance, which would have to introduce any amending legislation, said the issue was still under review.
Mr Pat Kennedy, senior VAT manager at BDO Simpson Xavier, said: "This notice has only just come out of Europe. Irish VAT legislation precludes local authorities from charging VAT in respect of off-street car parking. The initiation of infraction proceedings suggests that the treatment of local authorities under domestic VAT legislation does not conform to the treatment advocated under the Sixth Council Directive."
The directive enshrines principles for VAT law across the EU. Member-states are not allowed local laws that are at odds with those principles.
Mr Kennedy said the ruling would not affect on-street parking because local authorities are exempt from charging VAT on services which it has an obligation to provide or regulate, and which are not also provided by private sector.
The problem with local authority car parks is that private operators also run car parks but must charge VAT.
One industry source said that the amount of money involved in the car park debate would dwarf the €1 million a year the Revenue will lose out on as a result of another recent case where it was found to be charging VAT at 21 per cent on telephone line connections rather than 13.5 per cent.
If forced to start charging VAT, cash-strapped local authorities will have to decide whether to increase charges by 21 per cent or simply absorb the cost of the VAT. If they do raise prices, private operators may use the opportunity to increase their charges.
A spokeswoman for Dublin City Council said: "We are aware of this issue, and it will affect us. It does appear that VAT will have to be charged.
"We are waiting for the Minister, Mr Dick Roche, to issue a directive."
If it decides not to fight the case, the Government could introduce the necessary amending legislation in the Finance Bill, which is due to be published next Thursday.
Mr Kennedy said the last time the commission took VAT-related infraction proceedings against the State was over its failure to charge VAT to motorists at toll bridges. The State fought that case in the mid-1990s and lost.
The ruling is the latest in a series of judgments on VAT issues which have been at odds with the Irish interpretation of tax law.
Apart from the €1 million shortfall on VAT from phone connections, the Revenue faces a loss of between €10 million and €20 million in tax income after an EU ruling on VAT treatment of subsidised food sales at in-house canteens.
