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With hundreds of millions of pounds in local authority income from off-street parking at stake, Isle of Wight Council is among four battling to prove they don't have to account for VAT on the spoils.
Local authorities enjoy a 70% share of the nation's lucrative off-street car parking market and, if they are excused from paying VAT, their profits could be increased by more than 40%.
But private car park operators - including NCP, who have to charge their customers VAT every time they draw into a parking bay - say they will be subjected to unfair competition if council car parks become VAT free zones.
That burning issue - of vital importance to the revenues of every council in England and Wales - has pitted Isle of Wight, Mid-Suffolk, South Tyneside and West Berkshire Councils against HM Revenue and Customs (HMRC), who insist that VAT must be charged at council car parks.
The epic legal dispute has been mulled over by the VAT and Duties Tribunal, the High Court - twice - and even by the European Court of Justice in Luxembourg. And, with top QCs appearing on both sides, the legal costs of the row are already bound to be a seven-figure sum.
Now the case is entering a critical phase as a Tax Tribunal, sitting at London's Royal Courts of Justice, considers the councils' pleas that they should be treated as "non-taxable persons" and their off-street street parking services zero-rated for VAT.
Lawyers for HMRC are fighting the case every inch of the way, insisting that, to exempt councils from having to account for VAT on their off-street car parks, would distort competition with private operators and risk giving public authorities a virtual monopoly on the High Street.
Christopher Vajda QC, for HMRC, said VAT exemption would give councils a "financial windfall", more "pricing freedom" than NCP and other private-operators and amount to anti-competitive "aid" banned under European law.
The barrister said there is "intense competition" between local authorities and private car park operators in many high streets, with private operators often dropping their prices if there is a nearby council car park.
Government lawyers say that, if exempted from VAT, there can be no guarantee that councils will not pass on the savings to their customers and "exploit" their competitive advantage over private operators who have to account for the tax.
Not having to pay VAT would increase councils' off-street parking profits by over 40%, giving scope for ticket price cuts and other manoeuvres which could force private operators out of the market and discourage newcomers from entering it, HMRC lawyers argue.
But the four councils deny that VAT exemption would give them an unfair advantage and looked like winning the dispute in January 2007 when the VAT and Duties Tribunal ruled their off-street car parking facilities should be exempted from VAT.
The ruling promised not only to greatly increase the councils' car parking profits, but also held out the possibility of them reclaiming vast sums in VAT "wrongly paid" in the past.
The decision prompted 127 local authorities to launch VAT refund claims against HMRC, totalling more than £129 million and, in the four test cases alone, refunds of £1.6 million were sought.
But the Tribunal's ruling was just the start of the legal marathon, with HMRC taking the case first to the High Court and then to the European Court of Justice (ECJ) in Luxembourg.
In September 2009, the ECJ decided in favour of Revenue and Customs. The Euro-judges said that, if the risk of distorting competition was "more than negligible", then local authorities would have to account for VAT on off-street car parking ticket sales.
Now, in an another enormously costly hearing expected to last more than a week, the Tax Tribunal is reconsidering the case in the light of the ECJ ruling.
Private car park operators like NCP say they would face a "double whammy" of losing existing business and the likelihood of losing new customers if local authorities do not have to account for VAT on their car park ticket sales.
However, the four councils have always insisted that exempting them from VAT on their off-street car parks would cause no significant distortion of competition in their areas.
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