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 derogating from the provisions of this Directive, in order to simplify the procedure for charging VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 25 February 2021, Hungary requested an authorisation to continue to apply a measure derogating from point (a) of Article 26(1) and Articles 168 and 168a of the VAT Directive and to restrict the right of deduction of VAT on the leasing of certain passenger cars not wholly used for business purposes. The request was accompanied by a report including a review of the percentage foreseen for the limitation of the right of deduction.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 7 April 2021 of the request made by Hungary. The Commission notified Hungary by letter dated 8 April 2021 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 168a of the VAT Directive provide that a taxable person is entitled to deduct VAT charged on purchases made for the purpose of taxed transactions. Point (a) of paragraph 1 of Article 26 of that Directive contains a requirement to account for VAT when goods forming part of the assets of a business are put to use for private purposes of the taxable person or for that of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods 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 passenger cars, this system is difficult to apply, in particular because it is difficult to identify the split between private and business use. Where records are kept, they add an additional burden to both the business and the administration in maintaining and checking them.

Pursuant to Article 395 of the VAT Directive, Member States may apply measures derogating from the provisions of the VAT Directive to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance if they have been authorised by the Council.

Hungary is currently authorised on the basis of Council Implementing Decision (EU) 2018/1493 to limit to 50% the right to deduct the VAT paid on expenditure eligible for deduction in respect of the leasing of passenger cars which are not wholly used for business purposes and to relieve taxable persons from having to treat the non-business use of such passenger cars as a supply of services. Passenger cars covered by the measure are motor vehicles principally designed for the transportation of maximum 9 persons with a gross vehicle weight not exceeding 5 tons. Vehicles designed for transport of goods, vehicles serving special purposes (i.e. crane truck, fire engine, truck-mixer), vehicles designed for the transport of 10 or more than 10 persons, tractors and trailers are excluded from the restriction to the right of deduction of VAT and are treated under the normal rules. Taxable persons who do not wish to apply the 50% deduction limit and who wish to apply the VAT deduction up to the proportion of actual business use are allowed to do so provided they dispose of detailed evidence on the business use of leased passenger cars. This Council Implementing Decision shall expire on 31 December 2021. Hungary has requested to prolong the authorisation to limit the initial deduction to a set flat percentage rate and in turn to relieve the business from accounting for tax on the private use. Hungary informed the Commission that the grounds for the prolongation of the measure are largely the same as described in the previous request. Hungary confirms that the special measure has delivered positive results for both companies and tax authorities, and the rationale for the derogation continues to apply. In accordance with Article 5 of Council Implementing Decision 2018/1493, Hungary has also presented a report on the percentage limit set for the VAT deduction. Hungary considers that the applied 50 percentage limit remains appropriate. According to the data submitted, the estimated extent of private use of leased company cars ranges from around 43% to 53% during the period 2016-2019. Since the estimate is based on indirect evidence and assumptions and could thus be overestimated, Hungary considers that the 50% input VAT deduction limit is the most appropriate. Moreover, experience from inspections by the tax authority has shown that the vast majority – roughly 90-95% – of taxable persons inspected apply the mandatory 50% deductible proportion. According to Hungary, the reason is, clearly, that they are thereby relieved of the obligation to keep itemised records, and that the rate of 50% private use is sufficiently close to practice. Given the positive impact of the special measure on the administrative burden of tax payers and of tax authorities, it is proposed to grant the derogating measure for another limited period, until 31 December 2024. Any extension request should be accompanied by a report which includes a review of the percentage applied and should be sent to the Commission by 31 March 2024.

•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 (Estonia, Latvia, Croatia, Poland, Italy and Romania).

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.

Notwithstanding previous initiatives to establish rules on which categories of expenditure may be subject to a restriction on the right to deduct, such derogation is appropriate in the awaiting of a harmonisation of these rules at EU level.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis

Article 395 of the VAT Directive.