Proposal for a Council Decision amending Article 3 of Decision 98/198/EC authorising the United Kingdom to extend application of a measure derogating from Articles 6 and 17 of the sixth VAT Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2004-10-20
Institutions: European Commission
Subjects: United Kingdom, VAT, derogation from EU law, hire purchase, tax harmonisation, tax relief, vehicle rental

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.10.2004 
COM(2004) 682 final 

. 

Proposal for a 

COUNCIL DECISION 

amending Article 3 of Decision 98/198/EC authorising the United Kingdom to extend 
application of a measure derogating from Articles 6 and 17 of the sixth VAT Directive 
(77/388/EEC) on the harmonisation of the laws of the Member States relating to 
turnover taxes 

. 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

Under  Article  27  of  the  Sixth  Council  Directive  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  the  Council,  acting 
unanimously on a proposal from the Commission, may authorise any Member State 
to introduce special measures for derogation from the provisions of the Directive, in 
order to simplify the procedure for charging the tax or to prevent certain types of tax 
evasion or avoidance. 

As a rule, such authorisations are given on a temporary basis, so that an assessment 
can be made after a few years as to whether the special measures are appropriate and 
effective. 

Decision 95/252/EC of 29 June 19952 taken by the Council under Article 27 of the 
Sixth  Directive  authorised  the  United  Kingdom  to  apply  measures  derogating  from 
Articles 6 and 17 of the Directive. 

The  measures  authorised  under  Decision  95/252/EC  and  subsequently  under 
Decision 98/198/EC3 enable the United Kingdom first to restrict to 50% the right of 
the  hirer  or  lessee  to  deduct  input  tax  on  charges  for  hire  or  lease  of  a  business 
passenger car where the car is used for private purposes and, secondly, not to treat as 
supplies of services for consideration the private use of a business car hired or leased 
by a taxable person. The derogation removes the need for the hirer / lessee to keep 
records  of  private  mileage  travelled  in  business  cars  and  to  account  for  tax  on  the 
actual mileage of each car and is therefore a simplification. The derogation has been 
renewed a number of times but is due to expire on 31 December 2004. 

By letter received by the Secretariat-General on 14 June 2004, the United Kingdom 
requested  authorisation  to  extend  application  of  these  measures  by  a  further  three 
years. The Commission is content with this timescale as it will then be able to review 
the derogation in the light of future discussions on its proposals to define categories 
of restrictions to the right to deduct.  

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3 

OJ L 145, 13.6.1977, p.1. As last amended by Directive 2004/15/EC (OJ L 52, 21.2.2004, p. 61). 
OJ L 159, 11.7.1995, p. 19. 
OJ L 76, 9.3.1998, p. 37. 

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6. 

The  derogation  was  last  renewed  for  a  year  until  31  December 2004  by  virtue  of 
Council Decision 2003/909/EC4, pending the evaluation of the impact of the ruling in 
European  Court  of  Justice  case  number  C-17/01.  The  ruling,  delivered  on  29  April 
2004,  confirmed  the  validity  of  the  equivalent  German  derogation,  authorised  by 
Council Decision 2000/186/EC. The ruling means that the matters of law and of fact 
which justified the original application of the special measures in question have not 
changed and still pertain.  

7. 

In accordance with Article 27(2) of the Sixth Directive, the Commission transmitted 
the United Kingdom's request to the other Member States on 7 July 2004. 

4 

OJ L 342, 22.12.2003, p. 49. 

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Proposal for a 

COUNCIL DECISION 

amending Article 3 of Decision 98/198/EC authorising the United Kingdom to extend 
application of a measure derogating from Articles 6 and 17 of the sixth VAT Directive 
(77/388/EEC) 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,5  and  in  particular  Article 27  paragraph  1 
thereof, 

Having regard to the proposal from the Commission6,  

Having  regard  to  Council  Decisions  95/252/EC7,  98/198/EC8,  1999/79/EC9,  2000/747/EC10 
and 2003/909/EC11, 

Whereas: 

(1) 

(2) 

Pursuant to 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  or 
extend  special  measures  for  derogation  from  that  Directive  in  order  to  simplify  the 
procedure of charging the tax or to prevent certain types of tax evasion or avoidance. 

By letter registered with the Commission's Secretariat-General on 14 June 2004, and 
subsequently  circulated  to  all  Member  States  on  7  July  2004,  the  United  Kingdom 
government has requested the extension of the derogation previously granted to it by 
Council Decisions 95/252/EC and 98/198/EC. 

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OJ L 145, 13.6.1977, p.1. As last amended by Directive 2004/15/EC (OJ L 52, 21.2.2004, p. 61). 
OJ C […], […], p. […]. 
OJ L 159, 11.7.1995, p. 19. 
OJ L 76, 13.3.1998, p. 31. 
OJ L 27, 2.2.1999, p. 22. 
OJ L 302, 1.12.2000, p. 63. 
OJ L 342, 30.12.2003, p. 49. 

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(3) 

(4) 

(5) 

The extant derogation allows the United Kingdom  to  restrict to  50%  the right  of the 
hirer  or  lessee  to  deduct  input  tax  on  charges  for  the  hire  or  lease  of  a  business 
passenger car where the car is also used for private purposes. It also allows the United 
Kingdom not to treat as supplies of services for consideration the private use of a car 
hired or leased by a taxable person for business purposes. The derogation removes the 
need for the hirer / lessee to keep records of private mileage travelled in business cars 
and  to  account  for  tax  on  the  actual  private  mileage  of  each  car.  It  is  therefore  a 
simplification  measure  but  also  limits  the  scope  for  abuse  through  incorrect  record 
keeping.  

The legal and factual circumstances which justified granting authorisation to apply the 
original derogation have therefore not changed and are therefore still relevant. 

In  the  light  of  Commission  proposals  to  amend  Directive  77/388/EEC  as  regards 
restrictions  on  the  right  to  deduct  VAT,  it  is  appropriate  to  extend  the  period  of  the 
authorisation  until  the  amending  Directive  comes  into  force.  However,  this 
authorisation  will  expire  on  31  December  2007  at  the  latest  if  the  Directive  has  not 
entered into force by that date, enabling an assessment to be made at that time of the 
necessity for a derogation in the light of further discussions on that Directive held in 
the Council. 

(6) 

An  extension  will  have  no  impact  on  the  European  Communities'  own  resources 
accruing from value added tax 

HAS ADOPTED THIS DECISION:  

Article 1 

Article 3 of Decision 98/198/EC shall be replaced by the following: 

"Article 3 

This authorisation shall expire on the date of entry into force of Community rules determining 
what expenditure relating to motorised road vehicles is not to be eligible for full deduction of 
value added tax, but on 31 December 2007 at the latest." 

Article 2 

This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland. 

Done at Brussels, […] 

For the Council 
The President 

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