A total of 127 local authorities have appealed against the refusal of Revenue and Customs - the Government's tax collector - to repay them £129 million in VAT which the European Court of Justice ruled seven years ago should not have been levied.

And hundreds more councils are lining up with potential claims if the Treasury loses the last round at an appeal hearing in the same court.

Historically, local authorities in the UK have accepted that they are subject to VAT on the revenue raised by providing off-street parking.

But the ruling in December 2000 declared that, under the EU's VAT Directive, public bodies are not considered "taxable persons" unless the services they provide could lead to a "significant" distortion of fair competition with the private sector. Off-street parking was therefore not necessarily subject to tax.

But when just over one quarter of the country's 468 local authorities put in claims for their money back, Revenue and Customs refused.

So a test case sample of four local authorities - Isle of Wight Council, Mid-Suffolk District Council, West Berkshire District Council & South Tyneside Metropolitan Borough Council - appealed to the VAT and Duties Tribunal.

The Tribunal examined each local authority individually and decided they did not have to pay VAT because a VAT exemption would not seriously distort competition.

Revenue and Customs counter-appealed to the High Court, arguing that the VAT issue should not be determined on an "authority by authority" basis, but by deciding the overall impact on the private sector generally if UK local authorities were declared VAT-free.

Now the High Court has sent the matter back to Luxembourg, where EU judges will be asked to clarify the exact meaning of the VAT Directive phrase referring to VAT being due from local authorities in cases when not to pay it "would lead to a significant distortion of competition".