Proposal for a Council Decision authorising the United Kingdom to extend application of a measure derogating from Articles 6 and 17 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
Date: 1997-11-25
Institutions: European Commission
Subjects: United Kingdom, VAT, derogation from EU law, tax relief, vehicle rental

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.11.1997 
COM(97) 613 final 

Proposal for a 

COUNCIL  DECISION 

authorising the United Kingdom to extend  application 
of a measure derogating from  Articles 6 and  17 of the 
Sixth Council Directive (77/388/EEC) of 17 May  1977 
on the harmonisation  of the laws of the Member  States 
relating to turnover taxes 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

By  letter  registered  by  the  Commission's  Secretariat-General  on  6  October  1997,  the 
United Kingdom Government  requested  authorisation,  pursuant to Article 27 of the  Sixth 
Council Directive (77/388/EEC) of  17 May  1977 on the harmonisation  of the laws of the 
Member States  relating to turnover  taxes - Common  system  of value-added  tax:  uniform 
basis  of  assessment,1  to  extend  application  of  the  derogation  granted  to  it  by  Council 
Decision 95/252/EC of 29 June 1995.2 

In  accordance  with  the  above-mentioned  Article 27,  the  other  Member States  were 
informed  of the United Kingdom's request by letter dated 23 October  1997. 

The United Kingdom  was  authorised  by Decision 95/252/EC  to  apply  a  special  measure 
restricting to  50% the right of the hirer or lessee of a car to  deduct  input  tax  on  charges 
for  its hire or lease where it is used for  private purposes.  That  restriction  of the  right  to 
deduct  replaces the  collection  of the  VAT  which  would  be  due  in  respect  of the  private 
use of the car. 

This  measure  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  consideration  the  private use  of goods  forming  part  of the  assets 
of a business (by not levying VAT on the private use of the cars in question). 

According  to  the United Kingdom  Government,  this  restriction  of  the  right  to  deduct  is 
the  simplest  possible manner  of taxing  the  private  use  of  cars  hired  or  leased  by  taxable 
persons.  Moreover, the United Kingdom considers that this flat-rate restriction is justified 
since, overall, half the motoring in company cars is private motoring. 

This provision  also minimises 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. 

The  introduction  of  this  measure  was  part  of  a  thorough  recasting  of  the  rules  on  the 
deduction of VAT on cars.  As a result of the amendment in question, the 

United Kingdom's tax legislation has been brought  more closely into line with the general 
principles of the common VAT system. 

Besides the fact  that the measure relieves traders of certain administrative  obligations and 
so  constitutes  a  simplification  of  the  procedure  for  charging  tax  within  the  meaning  of 
Article 27  of  the  Sixth  Directive,  the  Commission  considered  that  the  derogation  was 
justified  because  it formed  part  of  a thorough  recasting  of the  rules  on  the  deduction  of 
VAT on vehicles, the results of which were largely positive. 

1  OJ No L  145,  13.6.1977, p. 1.  Directive as last  amended by Directive 96/95/EC (OJNoL338, 

28.12.1996, p. 89). 

2  OJ No L 159, 11.7.1995, p. 19. 

However,  the derogation was granted  only temporarily,  either until  the  entry  into  force  of 
the Community  rules, laid down by the Council,  determining what  expenditure  is not to be 
eligible  for  the  deduction  of  VAT  or  until  31 December  1997  at  the  latest  if  the 
Community  rules in question had not come into force by that date. 

Those  Community  rules  were  the  subject  of  the  proposal  for  a  twelfth  VAT  Directive, 
which the Commission has since decided to withdraw because it no longer reflects  current 
circumstances. 

The  Commission  therefore  considers  that  the  United Kingdom  should  be  authorised  to 
extend application of the measure in question temporarily. 

On  10 July  1996  the Commission  adopted  a work  programme  for  introducing  a  common 
VAT  system,3 which provides for stage-by-stage progress towards the new  system. 

On that  basis,  the  Commission  intends  within  the  next  few  months  to  present  a  proposal 
for a directive  on limitations of the right to  deduct  VAT  on  certain  expenditure,  including 
all  expenditure  relating  to  cars.  The  aim  of  that  proposal  is  to  bring  about  an 
approximation  of the relevant national rules, which currently differ very widely. 

The  Commission  therefore  considers  it  appropriate  to  limit  the  period  of  validity  of  this 
decision to  31 December  1998  so as to enable an assessment to  be made at that time  as to 
whether the derogation is consistent  with the global  approach  adopted  in the  proposal  for 
a directive. 

COM(96) 328 final, 22.7.1996. 

Proposal for a 

COUNCIL DECISION 

authorising the United Kingdom to extend 
application of a measure derogating from Articles 6 and 17 
of the Sixth Council Directive (77/388/EEC) of 17 May 1977 
on the harmonisation 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 
harmonisation  of  the  laws  of  the  Member States  relating  to  turnover  taxes  -  Common 
system  of  value  added  tax:  uniform  basis  of  assessment,1  and  in  particular  Article 27 
thereof, 

Having regard to the previous Council Decision 95/252/EC of 29 June  1995,2 

Having regard to the proposal from the Commission, 

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

Whereas, by letter registered  at the Commission's Secretariat-General  on 6 October  1997, 
the  United Kingdom Government  requested  authorisation  to  extend  application  of  the 
derogation previously granted to it by Council Decision 95/252/EC of 29 June 1995; 

Whereas  the  other  Member States  were 
United Kingdom's request; 

informed  on  23  October  1997  of  the 

Whereas  the  United Kingdom  was  authorised  by  Council  Decision 95/252/EC  of 
29 June  1995 to apply until 31 December  1997 a measure derogating from Articles 6 and 
17 of the Sixth Directive; 

Whereas the derogation  in question is designed, firstly,  to restrict to  50% the right of the 
hirer or lessee of a car to deduct the VAT on the hire or leasing transaction  where the car 

1  OJ No L  145,  13.6.1977, p.  1.  Directive as last amended by Directive  96/95/EC (OJNoL338, 

28.12.1996, p. 89). 

2  OJ No L 159, 11.7.1995, p. 19. 

Whereas the derogation  in question is designed, firstly, to restrict  to  50% the right of the 
hirer or lessee of a car to deduct the VAT on the hire or leasing transaction  where the car 
is used for  private purposes  and,  secondly, to waive the VAT  payable  on the  private use 
of the car in question; 

Whereas the objective  of this restriction  of the right to  deduct  is to tax the private use of 
cars hired or leased by taxable persons at a flat rate; 

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 tax within the meaning of Article 27 of the Sixth Directive; 

Whereas the Commission  adopted  on  10 July  1996 a work  programme,3  accompanied  by 
a  schedule  of  proposals,  providing  for  gradual,  stage-by-stage  progress  towards  a 
common VAT system for the single market; 

Whereas  the  authorisation  is  being  granted  until  31 December  1998  so  as  to  enable  an 
assessment  to  be  made  at  that  time  as to  whether  the  derogation  is  consistent  with  the 
Community  approach  to  limitations  of the right to  deduct  VAT  on  certain  expenditure, 
which will be adopted under that programme; 

Whereas  the  derogation  has  no  adverse  impact  on  the  European Communities'  own 
resources accruing from VAT, 

HAS ADOPTED THIS DECISION: 

COM(96) 328 final, 22.7.1996. 

Article 1 

By  way  of  derogation 
the  Sixth Council 
from  Article  17(2)  and 
Directive (77/388/EEC)  of  17 May  1977,  the  United Kingdom  is  hereby  authorised  to 
restrict  to  50% the right of the hirer or lessee of a car to deduct the VAT on the cost  of 
hiring or leasing that car where it is used for private purposes. 

(3)  of 

Article 2 

By way of derogation from Article 6(2)(a) of the Sixth Council Directive (77/388/EEC) of 
17 May  1977, the United Kingdom is hereby authorised not to treat as supplies of services 
for consideration the private use of a business car hired or leased by a taxable person. 

This authorisation shall expire on 31 December 1998. 

Article 3 

This Decision is addressed to the United Kingdom. 

Article 4 

Done at Brussels, 

For the Council 
The President 

ISSN 0254-1475 

COM(97) 613 final 

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