Proposal for a COUNCIL DECISION AUTHORISING THE UNITED KINGDOM TO APPLY AN OPTIONAL MEASURE DEROGATING FROM ARTICLE 17 OF THE SIXTH DIRECTIVE (77/388/EEC) ON THE HARMONIZATION OF THE LAWS OF THE MEMBERS STATES RELATING TO TURNOVER TAXES
Date: 1997-02-27
Institutions: European Commission
Subjects: United Kingdom, VAT, basis of tax assessment, derogation from EU law, tax relief

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  27.02.1997 
COM(97)64  final 

Proposal  for  a 

COUNCIL  DECISION 

AUTHORISING THE UNITED KINGDOM TO APPLY AN OPTIONAL 
MEASURE DEROGATING FROM ARTICLE  17 OF THE SIXTH 
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  Council  Decision  of  23  July  19871,  the  United  Kingdom  was  authorised,  on  the 
basis  of  Article  27(1)  to  (4)  of  the  Sixth  VAT  Directive2,  to  apply  a  measure 
derogating from Article  17(1)  of that  Directive  until  30  September  1990. By  Council 
Decisions  of  24  September  1990  (90/497/CEE)3  and  of  15  February  1993 
(93/111/EEC)4  further  extension  of the  derogation  was  permitted  until  31  December 
1992 and until 31 December  1996, respectively. 

The  derogation  forms  part  of  an  optional  system  of  taxation  for  undertakings  whose 
annual turnover does not exceed a given ceiling (£350.000 at the moment) in which tax 
is accounted  for  on the basis of cash paid  and received  (cash accounting). This system 
is partly based  on the third  subparagraph  of Article  10 (2) of the said Directive, which 
permits payment of tax to be deferred  until receipt of the price. 

The object  of this derogation,  which is designed  to  simplify  collection  of the tax,  is to 
permit  deduction  of input tax by firms  that  have opted  for  the  simplified  scheme  only 
when it is paid to the supplier. 

By  letter  registered  by the  Commission's  Secretariat-General  on  19 November  1996, 
the  United  Kingdom  Government  submitted  to  the  Commission  a  request  for  the 
previously  authorised  derogation  to  be  extended  until  31 December  2000  and  for  the 
ceiling  to  be  increased  from  £350.000  to  £400.000.  Differing  from  the  previous 
requests,  the  United  Kingdom  Government  seeks  also  authorisation  for  a  derogation 
from  the  provisions  of  Article  22(4)  and  (5),  as  it  believes  that  the  cash  accounting 
scheme is rather based  on a derogation  from  these provisions than on the provisions of 
Article  10 (2), which has partly been the basis for the simplified  scheme up to now. 

In accordance with Article 27(3) of the Sixth Directive, the other  Member  States were 
informed  by letter dated  18 December  1996 of the United Kingdom's request. 

The United Kingdom considers the extension of the derogation to be amply justified  in 
view  of the  number  of  firms  that  have  already  opted  for  using  the  simplified  scheme 
and  the  favourable  reception  given  to  it  by  the  trade  and  professional  bodies 
concerned. 

The Commission  notes that in  1993 the derogation was authorised by the Council with 
a turnover  limit which was, at the time, approximately  equivalent  to ECU 432.000. In 
its present request for  authorisation, the United Kingdom authorities wish the turnover 
limit to be increased  to £400.000, which is approximately  equal to ECU  541.000. This 
adjustment  is considered by the Commission to be acceptable. 

1  OJNoL213.  4.8.1987, p. 40 
2  OJ No L  145,  13.6.1977, p.  1, as last amended by Directive 96/95/EC, OJ No L 338, 28.12.1996, p. 
89 
3  OJ No L 276, 6.10.1990, p. 45 
4  OJ No L 43, 20.2.1993, p. 46 

The United Kingdom Government  also  requests for  a derogation from Article  22  (4) 
and  (5),  indicating  that  a  derogation  from  these  provisions  is  a  more  appropriate 
footing,  as  the  existing  scheme  does  not  seek  to  change  the  time  of  the  chargeable 
event. 

The Commission would like to point out that the third subparagraph of Article  10 (2) 
permits Member States to fix,  for certain transactions of certain categories  of taxable 
persons,  a  moment  when  the  tax  shall  become  chargeable  but  does  not  affect  the 
moment of the chargeable event.  Consequently, the Commission is of the opinion that 
no derogation from Article 22 (4) and (5) is needed. 

Article  17 (1) provides that the right to deduct shall arise at the time the tax becomes 
chargeable.  The  Commission  considers  the  derogation  from  Article  17  (1),  which 
postpones the right of deduction of tax until  it has been  paid to the  supplier,  to  be a 
reasonable  adjustment  to  the  option  provided  for  in  Article  10  (2),  which  permits 
payment of tax to be deferred until receipt of the price. 

The  Commission  considers  that  the  United  Kingdom  can be  authorised  to  apply the 
derogation  for  a  period  expiring  on  31  December  1999.  In  fact,  the  Commission 
adopted  on  10 July  1996  a work  programme  based  on  a  step-by-step  approach  for 
progressing  towards  a new  common  system  of  VAT  (COM  (96)  328  final,  22  July 
1996). The last package of proposals to be put forward by mid-1999, the Commission 
considers  it  appropriate  to  reconsider  the  necessity  and  the  coherence  of  a  specific 
measure in the framework of the global approach of the new common VAT system. 

3 

Proposal for a 

COUNCIL DECISION 

AUTHORISING  THE UNITED KINGDOM TO APPLY AN OPTIONAL  MEASURE 
DEROGATING  FROM ARTICLE  17 OF THE SIXTH  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,  under  the  terms  of  Article  27(1)  of  Directive  77/388/EEC,  the  Council, 
acting  unanimously  on  a  proposal  from  the  Commission,  may  authorise  any  Member 
State to introduce special measure for  derogation from  the provisions of that  Directive 
in order  to  simplify  the  procedure  for  charging  the  tax  or  to  prevent  certain  types  of 
tax evasion or avoidance; 

Whereas  the  United  Kingdom  was  authorised,  by  Decision  93/111/EEC2,  in 
accordance  with  the  procedure  laid  down  in  Article  27(1)  to  (4)  of  Directive 
77/388/EEC,  to  apply  a measure  derogating  from  Article  17(1)  of  the  said  Directive 
until 31 December  1996; 

Whereas the United  Kingdom,  by  means  of  a letter  registered  by the  Commission  on 
19 November  1996, requested  authorisation to extend the said derogation; 

Whereas the other Member  States were informed  on  18 December  1996 of the United 
Kingdom's request; 

Whereas this special  measure  derogating  from  Article  17(1) of Directive  77/388/EEC 
forms  part  of an optional  system  of taxation  for firms with  an annual  turnover  of less 
than  £400.000 based  on the third  subparagraph  of Article  10 (2)  of the said Directive, 
which permits payment of tax to be deferred  until receipt of the price; 

1  OJ No L  145,  13.6.1977, p.  1, as last amended by Directive 96/95/EC, OJ No L 338, 28.12.1996, p. 
89 
2  OJ No L 43, 20.2.1993, p. 46 

V 

Whereas the United Kingdom wishes to increase the turnover ceiling from £350.000 to 
£400.000 to take account of inflation; 

Whereas a derogation can be accepted in view of the number of firms that already have 
opted for this simplified scheme and the limited duration of this extension; 

Whereas  the  derogation  in  question  does  not  have  a  negative  effect  on  the  own 
resources of the European Communities accruing from VAT, 

Whereas  the  Commission  adopted  on  10  July  1996  a work  programme  based  on a 
step-by-step approach for progressing towards a new common system of VAT (COM 
(96) 328 final, 22 July 1996); 

Whereas  the  last  package  of  proposals  is  to  be  put  forward  by  mid-1999,  the 
authorisation  is granted  until  31  December  1999,  in order to  permit  an evaluation  of 
the coherence  of the derogation  with  the global  approach  of the  new  common  VAT 
system, 

HAS ADOPTED THIS DECISION: 

5~ 

Article I 

By way of derogation from the provisions of  Article  17(1)  of  Directive  77/388/EEC, 
the United Kingdom is hereby authorised,  until  31  December  1999, to provide within 
an optional scheme that enterprises with an annual turnover of less than £400.000 must 
postpone the right of deduction of tax until it has been paid to the supplier. 

This Decision is addressed to the United Kingdom. 

Article 2 

Done at Brussels, 

For the Council, 
The President 

6 

ISSN 0254-1475 

COM(97) 64  final 

DOCUMENTS 

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09  06  08  10 

Catalogue number  :  CB-CO-97-069-EN-C 

ISBN  92-78-16263-9 

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