Proposal for a COUNCIL DECISION authorizing the United Kingdom to apply a measure derogating from Articles 6 and 17 of the Sixth Council Directive (77/388/EEC) on the harmonization of the laws of the Member States relating to turnover taxes
Date: 1995-06-21
Institutions: European Commission
Subjects: United Kingdom, VAT, hire purchase, motor car, tax relief, vehicle rental

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels, 21.06.1995 
COM(95) 275  final 

Proposal  for  a 

COUNCIL  DECISION 

authorizing the United Kingdom to apply a measure derogating 
from Articles 6 and 17 of the Sixth Council Directive (77/388/EEC) 
on the harmonization of the laws of the Member States  relating 
to turnover  taxes 

(presented  by the  Commission) 

EXPLANATORY  MEMORANDUM 

By registered letter  sent to the Secretariat-General of the Commission on 22 March 1995, 
the United Kingdom  Government,  acting  on the basis  of Article 27  of the  Sixth  Council 
Directive (77/388/EEC) of 17 May  1977 on the harmonization of the laws of the Member 
States relating to turnover taxes - Common  system  of value  added  tax:  uniform  basis of 
assessment,1 requested authorization to apply a measure derogating from Articles 6(2) and 
17 of that Directive. 

In accordance with Article 27(3) of the Directive, the other Member States were informed 
of the United Kingdom's request by letter dated 20 April 1995. 

The measure  requested  is part  of  a thorough  recasting  of the  rules  on  the  deduction  of 
input tax on cars.  United Kingdom tax legislation provides for a general restriction on the 
right to deduct input tax on the purchase of cars, except in a limited number of cases. 

In order to increase the transparency of its VAT system, the United Kingdom Government 
intends to amend the national provision concerned by allowing full  deduction of input tax 
on the purchase of cars which are to be used only for the purposes of transactions  subject 
to VAT. 

Under existing legislation, input tax on cars purchased for long-term hire or leasing is not 
deductible.  Input  tax  on  car  hire  or  leasing  services  is,  on  the  other  hand,  deductible 
under the standard rules of the common VAT system.  According to the United Kingdom, 
this  restriction,  which  is applied  at  the  time when  cars  are  purchased  by  hire  or  leasing 
companies, is a proxy for taxing the private use of such cars by the hirer or lessee. 

However, the amendment planned by the United Kingdom, in allowing car leasing or hire 
companies to deduct input tax on cars purchased wholly for business purposes, would not 
in itself ensure taxation of private use. 

Accordingly, the United Kingdom Government wishes to introduce a new measure which 
would  arrive  at  an  equivalent  result,  i.e.  flat-rate  taxation  of  the  private  use  of  hire  or 
leased cars. 

To  that  end,  the United  Kingdom  has submitted  a request  under  Article  27  of the  Sixth 
Directive to apply a measure making the charge to the lessee or hirer of a car subject  to a 
50%  input tax  restriction  where there is private use.  This  restriction  would  replace  the 
VAT due on the use of the car for private motoring. 

OJ No L  145,  13.6.1977,  p.  1.  Directive  as last  amended  by Directive  95/7/EC 
(OJNoL102,  5.5.1995, p. 18). 

A 

According to the United Kingdom Government, this input tax restriction would enable the 
private use of cars leased  or hired by taxable persons to be taxed  in the simplest  possible 
manner.  Moreover, the United Kingdom considers that this flat-rate  restriction is justified 
since, overall, about half the motoring in business cars is private motoring. 

This  provision  will  also  minimize  the  administrative  burden  on  traders,  who  are  not 
required to keep records distinguishing between business mileage and private mileage.  In 
addition, it facilitates administration of the tax. 

Under Article 27 of the Sixth Directive, any Member State may be authorized to introduce 
into  its  national  legislation  special  measures  derogating  from  the  Directive  in  order  to 
simplify  the procedure  for  charging the tax  or to  prevent  certain  types  of tax  evasion  or 
avoidance. 

According to the standard rules of the common VAT system, a taxable person may deduct 
input tax  on  car  hire  or  leasing  charges  provided  that  he  uses the  vehicle  for  an  activity 
conferring  the right to deduct  input  tax.  VAT is, however,  payable on the private use of 
such a vehicle.  To that  end, the trader's accounts must contain the particulars required  to 
calculate the amount of VAT payable. 

The measure planned  by the United  Kingdom  Government,  which  is aimed  at  restricting 
the right to  deduct  input  tax  with  a view  to  taxing  the  private  use  of  a  car,  derogates, 
firstly, from Article  17 of the Sixth Directive (by introducing  a restriction  on the  right  to 
deduct)  and,  secondly,  from  Article  6(2),  which  treats  as  supplies  of  services  for  a 
consideration the use of goods forming  part of the assets of a business for  private use (by 
not levying VAT on the private use of the cars in question).  Since this measure eliminates 
the need for traders to  meet  certain administrative obligations, the Commission  considers 
that  it  does  indeed  simplify  the  procedure  for  charging  the  tax  within  the  meaning  of 
Article 27. 

Moreover,  it  should  be  pointed  out  that,  in  abolishing  the  input  tax  restriction  on 
purchases of cars used solely for  an activity subject to VAT, such as the hire or leasing of 
cars,  United  Kingdom  tax  legislation  will  be  brought  more  closely  into  line  with  the 
general principles of the Community VAT system, as laid down in the Sixth Directive. 

The  amendment  in  question  will  also  eliminate  the  cases  of  double  taxation  which  can 
occur under the existing rules when the hirer or lessee of a car is a private individual or a 
taxable person carrying on activities which do not confer the right to  deduct  input tax.  In 
such cases, the person concerned is liable for the VAT payable on the services invoiced by 
the leasing or  hire companies, while this tax is calculated  on the basis  of an amount  that 
implicitly includes the amount of VAT those companies were unable to deduct  at the time 
of purchasing the vehicles. 

In  introducing  a  restriction  on  the  right  of  the  hirer  or  lessee  to  deduct  input  tax,  the 
United Kingdom would continue to achieve its objective of taxing at a flat rate the private 
use  of  hire  or  leased  cars  while  complying  to  the  greatest  possible  extent  with  the 
principles of the common VAT system. 

Accordingly,  the  Commission  considers  that  the  derogation  requested  is justified  by the 
fact that it forms part of a thorough recasting of the rules on the deduction of input tax on 
cars the results of which are largely positive. 

In  addition,  the  measure  envisaged  will  have  no  adverse  impact  on  the  European 
Communities' own resources accruing from VAT. 

The  Commission,  therefore,  considers  it  appropriate  for  the  United  Kingdom  to  be 
authorized to apply the planned special measure. 

However, it should be pointed out that the first subparagraph of Article  17(6) of the Sixth 
Directive  lays  down  that  the  Council,  acting  unanimously  on  a  proposal  from  the 
Commission,  will  decide  what  expenditure  is  not  eligible  for  a  deduction  of  VAT. 
Consequently,  the  Commission  considers  that  the  authorization  to  apply  a  measure 
derogating  from  Article  17(2) and (3) the effect  of which is to restrict  the right to deduct 
input tax  should be granted  only temporarily,  i.e. until such time as the Community  rules 
laid down by the Council enter into force  and until 31 December  1997 at the latest  if the 
Community rules in question have not entered into force by that date. 

3 

Proposal for a 

COUNCIL DECISION 

authorizing the United Kingdom to apply a measure derogating 
from Articles 6 and 17 of the Sixth Council Directive (77/388/EEC) 
on the harmonization of the laws of the Member States relating 
to turnover taxes 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  the  Sixth  Council  Directive  (77/388/EEC)  of  17  May  1977  on  the 
harmonization  of  the  laws  of  the  Member  States  relating  to  turnover  taxes  -  Common 
system  of  value  added  tax:  uniform  basis  of  assessment1  ,  and  in  particular  Article  27 
thereof, 

Having regard to the proposal from the Commission, 

Whereas, pursuant to Article 27(1) of the Sixth Directive, the Council, acting unanimously 
on  a  proposal  from  the  Commission,  may  authorize  any  Member  State  to  introduce 
special measures for derogation from that Directive, in order to simplify  the procedure for 
:harging the tax or to prevent certain types of tax evasion or avoidance; 

Whereas,  by  registered 
the  Commission  dated  22  March  1995,  the 
United Kingdom  requested  authorization  to  introduce  a  measure  derogating  from 
Articles 6(2) and  17 of the Sixth Directive; 

letter 

to 

Whereas,  in  accordance  with  Article  27(3)  of  the  Sixth  Directive,  the  other  Member 
States were informed  on 20 April  1995 of the request made by the United Kingdom; 

OJ No L  145,  13.6.1977, p.  1.  Directive as last amended by Directive 95/7/EC  (OJ No L 102, 
5.5.1995) 

Whereas  the  derogation  in  question,  which  forms  part  of  a  thorough  recasting  of  the 
legislation governing the  deduction  of input  tax  on cars,  aims, firstly, to  restrict  to  50% 
the right of the hirer or lessee to deduct input tax on car hire or leasing transactions where 
the  car is used for  private purposes  and,  secondly, to waive the value added  tax payable 
on the private use of the car in question; 

Whereas  the  objective  of this  input  tax  restriction  is to  introduce  a  flat-rate  tax  for  the 
private use of cars hired or leased by taxable persons; 

Whereas  the  measure,  by  reducing  the  administrative  burden  on  traders,  who  are  not 
required to keep records of private mileage, constitutes  a simplification  of the  procedure 
for charging the tax within the meaning of Article 27 of the Sixth Directive; 

Whereas  the  authorization  requested  by  the  United  Kingdom  can  be  granted  only 
temporarily,  either  until  the  entry  into  force  of  the  Community  rules  determining  what 
expenditure  will  not  be  eligible  for  a  deduction  of value  added  tax  pursuant  to  the first 
subparagraph of Article  17(6) of the Sixth Directive or by 31 December  1997 at the latest; 

Whereas the derogation in question has no adverse impact on the European Communities' 
own resources accruing from value added tax, 

HAS ADOPTED THIS DECISION: 

r 

Article 1 

By  way  of  derogation  from  Article  17(2)  and  (3)  of  the  Sixth  Council  Directive 
(77/388/EEC)  of  17 May  1977, the United Kingdom is hereby authorized  to restrict to 
50% the right of the hirer or lessee to deduct input tax on charges for the hire or lease of a 
car where the car is used for private purposes. 

Article 2 

By  way  of  derogation from Article  6(2)(a)  of  the  Sixth  Council  Directive,  the  United 
Kingdom is hereby  authorized  not  to  treat  as  supplies  of  services  for  consideration  the 
private use of a business car hired or leased by a taxable person. 

Article 3 

This authorization shall expire on the date of the entry into force of the Community rules 
determining  what  expenditure  is  not  to  be  eligible  for  a deduction  of  value  added tax, 
pursuant to  the first subparagraph of Article  17(6)  of the  Sixth Directive,  but  not later 
than 31 December 19?7. 

This Decision is addressed to the United Kingdom. 

Article 4 

Done at Brussels, 

For the Council 
The President 

£ 

BSN 0254-1475 

COM(95) 275  final 

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