amending Decision 2007/884/EC authorising the United Kingdom to continue to apply a measure derogating from Articles 26(1)(a), 168 and 169 of Directive 2006/112/EC on the common system of value added tax

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive, in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 2 April 2019, the United Kingdom requested the authorisation to continue to apply a measure derogating from the overall principles governing the right of deduction of input VAT in relation to cars hired or leased where the car is not used entirely for business purposes. Together with the request for extension, the United Kingdom submitted a report including a review of the percentage restriction applied on the right to deduct VAT on the hire or lease of cars not entirely used for business purposes.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 29 April 2019 of the request made by the United Kingdom. By letter dated 2 May 2019, the Commission notified the United Kingdom that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Articles 168 and 169 of the VAT Directive provide that a taxable person is entitled to deduct the VAT charged on purchases made for the purposes of his taxed transactions. At the same time, Article 26(1)(a) of the VAT Directive stipulates that the use of goods, forming part of the assets of a business, for private purposes is to be considered as a supply of services for consideration if the VAT on these goods was wholly or partly deductible. As a result, the system ensures that final consumption is taxed when the corresponding input VAT was initially deducted.

In relation to motor vehicles, it is sometimes difficult and burdensome for the taxable persons to identify and register the split between business and private use and for the tax administration to verify the effective division of use. This would be the case even if the United Kingdom would make use of the option provided for in Article 168a(2) of the VAT Directive to limit the deduction on expenditure related to company cars to the proportion of the taxable person's effective business use. In addition, because of the number of mixed use vehicles, tax evasion could become considerable.

In order to simplify VAT collection and to combat tax evasion, the United Kingdom has been authorised since 1995 and for the last time in 2016 to restrict, until 31 December 2019, to 50% the right of the hirer or lessee to deduct input tax on charges for hire or lease of a car where the car is not used entirely for business purposes. In order to avoid double taxation the United Kingdom is also authorised not to treat the private use of a business car hired or leased by a taxable person as a supply of services for consideration.

This derogation removes the need for the hirer or the lessee to keep detailed private mileage records for each of these cars and to account for the VAT on the private use. The option provided for in Article 168a(2) of the VAT Directive does not foresee partial deduction at a flat rate and could be applicable only for input VAT on cars forming part of the business assets of the taxable person; therefore, a derogation is an appropriate measure to achieve the requested simplification.

In accordance with Article 3(2) of Council Decision 2007/884/EC, as amended, the United Kingdom has presented a report covering the application of the Decision, which includes a review of the percentage restriction applied on the right to deduct VAT on the hire or lease of cars not entirely used for business purposes.

Derogations are normally granted for a limited time as to allow an assessment whether the special measure is appropriate and effective. The report provided by the United Kingdom suggests that the 50% apportionment between business and private use (or any other non-business use within the meaning of Article 26(1)(a) of Directive 2006/112/EC) currently still reflects the overall business and private use of leased and hired cars by taxable persons in the United Kingdom. An extension of the derogating measure is therefore appropriate.

The United Kingdom has requested to be authorised to continue the application of the derogation until the end of the implementation period foreseen in the withdrawal agreement. In this regard, on 29 March 2017 the United Kingdom submitted the notification of its intention to withdraw from the Union pursuant to Article 50 of the Treaty on the European Union (TEU). In accordance with Article 50(3) TEU, the Treaties are to cease to apply to the withdrawing State from the date of entry into force of a withdrawal agreement or, failing that, two years after the notification, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period. The period has been extended three times, last time by European Council Decision (EU) 2019/1810, which extended it until 31 January 2020. On 11 January 2019, by Decision (EU) 2019/274, the Council authorised the signature of the withdrawal agreement agreed at negotiators’ level on 14 November 2018. The Union confirmed that it stands ready to proceed swiftly with its signature and conclusion in the event that the United Kingdom Parliament approves the withdrawal agreement. Part Four of the withdrawal agreement provides for a transition period starting on the date of entry into force of the agreement, during which Union law is to continue to apply to and in the United Kingdom as laid down therein. In any event, this Decision applies only as long as Union law applies to and in the United Kingdom. Therefore, given the uncertainty related to the date of entry into force of the withdrawal agreement, it is considered that the most appropriate way forward is to include a sunset clause, set at 31 December 2022. The United Kingdom is requested to present a new report no later than 1 April 2022, if a new extension request would be envisaged beyond 31 December 2022. Nevertheless, in case of withdrawal of the United Kingdom from the European Union without agreement or in case of the ratification of the withdrawal agreement, the derogation should cease to apply on whichever date happens first: either 31 December 2022, or the date of withdrawal from the Union without an agreement, or the date of the end of the transition period foreseen in the withdrawal agreement in case of the ratification of the withdrawal agreement.

•Consistency with existing policy provisions in the policy area

Similar derogations in relation to the right of deduction have been granted to other Member States.