authorising the United Kingdom in respect of Northern Ireland to apply a special measure derogating from Articles 16 and 168 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 (hereafter ‘the VAT Directive’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures derogating 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.

The United Kingdom has left the European Union (EU) on 31 January 2020. In accordance with the Withdrawal Agreement, it is now a third country to the EU.

As from 1 January 2021, the EU VAT legislation is no longer applicable in the United Kingdom. However, on the basis of the Protocol on Ireland/Northern Ireland (hereafter the ‘Protocol’), which is part of the Withdrawal Agreement, Northern Ireland remains under the EU VAT legislation regarding goods with a view to avoiding a hard border between Ireland and Northern Ireland. For services, on the other hand, Northern Ireland is, together with the rest of the United Kingdom, considered as outside the EU.

This inevitably leads to a dual or mixed VAT system in Northern Ireland whereby supplies, intra-Community acquisitions and importations of goods that are located in Northern Ireland, according to the rules on the place of taxable transactions laid down in Title V of the VAT Directive, are subject to the harmonised EU rules, while supplies of services made in that same territory are not subject to the EU VAT system.

Therefore, to continue applying in Northern Ireland a special scheme on VAT, which provides for flat-rate measures in respect of non-deductible value added tax charged on fuel expenditure in company cars, which deviate from the general rules laid down in the VAT Directive, the granting of a derogation pursuant to Article 395(1) of the VAT Directive is needed.

By letter registered with the Commission on 27 November 2020, the United Kingdom requested authorisation to continue to apply a measure derogating from Articles 16 and 168 of the VAT Directive. In accordance with Article 395(2) of the VAT Directive, the Commission informed the Member States by letter dated 10 December 2020 of the request made by the United Kingdom. By letter dated 11 December 2020, the Commission notified United Kingdom that it had all the information it considered necessary for appraisal of the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Article 168 of the VAT Directive provides that a taxable person is entitled to deduct VAT charged on purchases made for the purpose of taxed transactions. Article 16 of the same Directive requires the application by a taxable person of goods forming part of his business assets for his private use or for that of his staff to be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible. This system allows for the recovery of initially deducted VAT in relation to the private use.

In the case of company cars, partly used for private (non-business) purposes, it is often a difficult matter to calculate and to tax expenditure related to the private use under the above-mentioned rules.

In this context, the United Kingdom has operated a special scheme of flat rate taxation of private use of company cars authorised by Council Decision 86/356/EEC of 21 July 1986, authorising the United Kingdom to apply flat-rate measures in respect of non-deductible value added tax charged on fuel expenditure in company cars, which was based on the engine capacity and fuel type of the car.

This original derogation was abolished and replaced by Council Decision 2006/659/EC of 25 September 2006 authorising the United Kingdom to introduce a special measure derogating from Articles 5(6) and 11(A)(1)(b) of Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes, introducing a flat rate taxation of the private use on the basis of the car’s CO2 emission rating. The latter Council Decision was on its turn replaced by Council Implementing Decision (EU) 2015/2109 of 17 November 2015, which expired on 31 December 2018. A further extension of the measure, until 31 December 2020, was granted by Council Implementing Decision (EU) 2018/1918 of 4 December 2018.

The scheme is based on the fact that there is a direct relationship between the emission and the amount of fuel consumed as higher emissions correspond with greater fuel consumption. Based on these emission ratings, the fuel consumption per kilometre is calculated, which is then combined with the average private mileage determined on the basis of direct tax data and the retail price of road fuel. This results in a private use charge which corresponds with the amount of VAT due on the private use of the vehicle. The system is optional for taxable persons who may choose not to recover VAT on their fuel. Alternatively, they may keep detailed mileage records to provide evidence and support a calculation of their private mileage.

The United Kingdom included in its request an explanation on the functioning of the derogating measure. According to the United Kingdom, this system has proven to be accurate and has led to a substantial simplification, both for businesses and the tax administration. The United Kingdom also submits that it provides taxable persons with legal certainty by providing a simplified method which can be used to account for VAT on private use of fuel.

On this basis, the United Kingdom in respect of Northern Ireland has requested to be authorised to continue the application of the derogation from 1 January 2021. The derogation should be limited in time to 31 December 2023, so that it can be assessed whether the flat-rate scheme is still a correct reflection of the overall apportionment between business and private use.

•Consistency with existing policy provisions in the policy area

Article 176 of the VAT Directive stipulates that the Council shall determine the expenditure on which the VAT is not deductible. Until such time, it authorises Member States to maintain exclusions which were in place on 1 January 1979. There are therefore a number of “stand still” provisions restricting the right to deduct VAT in relation to passenger cars.