The UK’s tax authorities have decided to fight against a ruling that would cut VAT across all public electric car chargers, despite a judge finding they have been overcharging for years under the law.

Charge My Street, a not-for-profit charging company, last month argued successfully that VAT should have been charged at 5%, rather than 20%, in a case at a London tax tribunal that could have a significant impact on electric car drivers’ costs. HM Revenue and Customs on Tuesday confirmed it will appeal against the ruling.

The appeal will in effect mean the government arguing to extend a disparity that costs some electric car drivers much more to recharge their vehicles, disincentivising the shift away from petrol and diesel.

Charge point operators said the decision to appeal would hold back the transition from polluting petrol and diesel by penalising electric car owners who cannot charge at home.

Electric car drivers have long complained they have to pay an unfair rate of VAT at public chargers. People plugging in at home pay only 5% VAT on electricity for domestic use, but the 20% rate for businesses applies at public chargers.

Campaigns to equalise the rates have appeared forlorn for years, with successive governments unwilling to lose out on future electricity VAT revenues to replace the £24.5bn in annual fuel duties applied on petrol and diesel sales. However, a London tax tribunal last month found that the 5% rate should in fact have applied all along – to the surprise and delight of the EV charging industry.

The VAT difference brings in an extra £85m a year for the Treasury, according to calculations by Zapmap, a charger map company. However, that is projected to rise to £315m by 2030 and billions after that as the number of electric cars rises.

The government does not appear so pleased. If the ruling is upheld it will put the Treasury in a tricky spot, amid fiscal pressures caused by the Iran war and pressure to abandon a planned fuel duty increase. The government is already committed to introducing pay-per-mile taxes on all electric cars.

Will Maden, a director at Charge My Street, said: “About 40% of the UK population, they don’t have drives. Transitioning to EVs is a huge problem. Adding 20% makes a huge difference.

“My personal view is I think we should be making the transition to EVs as cheap as we can. This is an environmental issue.”

Although the ruling only applies to Charge My Street, if the appeal fails, operators are geared up to lodge their own claims for overpaid VAT going back years.

John Lewis, chief executive at char.gy, a charge point operator, said HMRC’s appeal was a “deeply disappointing decision, and one that sends entirely the wrong signal to the millions of people who rely on public charging”. He said the company would immediately pass on a VAT cut to its customers.

He said: “The government talks about accelerating EV adoption, yet is actively choosing to maintain a tax structure that makes public charging more expensive than it needs to be and undermines the transition.”

The case hinges on the interpretation of a few lines in the VAT Act. It says that electricity counts as “always for domestic use” as long as one person does not use more than 1,000 kilowatt hours (kWh) a month at a single premises – enough to recharge a Tesla Model Y 16 times over. Accountancy firm Deloitte discovered the discrepancy, and worked pro bono with Charge My Street.

Three days of arguments at a tax tribunal focused on minutiae, such as the implications of the words “a month” and “premises”, according to Daniel Barlow, a Deloitte tax partner. However, in the end, Judge Harriet Morgan found it would be a “strained construction” to go for the 20% rate.

An HMRC spokesperson said: “We’re appealing this case, as our position is that standard rate VAT applies to electricity supplied through public EV charging infrastructure.”