Proposal for a Council Decision authorising the United Kingdom to introduce a special measure derogating from Articles 5(6) and 11(A)(1)(b) of Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes (Only the English text is authentic)
Date: 2006-06-08
Institutions: European Commission
Subjects: United Kingdom, derogation from EU law, motor vehicle industry, tax avoidance, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 08.06.2006 
COM(2006) 280 final 

Proposal for a 

COUNCIL DECISION 

authorising the United Kingdom to introduce a special measure derogating from 
Articles 5(6) and 11(A)(1)(b) of Directive 77/388/EEC on the harmonisation of the laws 
of the Member States relating to turnover taxes 

(Only the English text is authentic) 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

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•  Grounds for and objectives of the proposal 

Pursuant to Article 27(1) 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, the Council, acting 
unanimously on a proposal from the Commission, may authorise any Member State to 
apply  special  measures  for  derogation  from  that  Directive  in  order  to  simplify  the 
procedure for charging the tax. 

By letter registered with the  Secretariat-General of the Commission on 7 April  2005, 
the United Kingdom requested authorisation to replace an existing derogation measure 
in  relation  to  the  calculation  of  the  VAT  due  on  fuel  expenditure  for  business  cars 
which  are  also  partly  used  for  private  purposes.  In  accordance  with  Article  27(2)  of 
Directive  77/388/EEC,  the  Commission  informed  the  other  Member  States  by  letter 
dated 26 October 2005 of the request made by the United Kingdom. By letter dated 27 
October  2005,  the  Commission  notified  the  United  Kingdom  that  it  had  all  the 
information it considered necessary for appraisal of the request. 

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•  General context 

The United Kingdom obtained an authorisation in 1986 to apply a flat-rate scheme for 
determining the amount of VAT as regards fuel expenditure in relation to the private 
use of business cars (Council Decision 86/356/EEC). 

Under this system, the United Kingdom allowed an initial full deduction of VAT on the 
purchase of fuel for business cars. Subsequently, VAT was charged on the fuel which 
related to the private use of the car. The average overall price of the fuel for the private 
use  of  the  business  cars  was  calculated  on  a  macro-economic  basis  and  then  charged 
according  to  a  scale  which  corresponded  to  the  engine  capacity  and  fuel  type  of  the 
vehicle.  This  average  price  was  adjusted  annually  in  line  with  the  changes  in  the 
average cost of fuel. 

The system represented a simplification, both for the tax authorities and for taxpayers. 
In particular, it relieved taxpayers of the need to keep detailed mileage records. At the 
same time, it should be noted that this system was optional for taxpayers, who could 
follow  the  normal  VAT  rules  if  they  so  wished  and  comply  with  record  keeping 
obligations.  

The United Kingdom now envisages changing its system. The basic principles would 
remain the same but the new proposed system would apply a "scale charge" linked to 
the CO2 emissions of a vehicle. As there is a direct correlation between CO2 emission 
and  fuel  consumption,  the  higher  the  CO2  emission,  the  higher  the  fuel  consumption 
and therefore the higher the amount of VAT which should be paid to account for the 
fuel used for private motoring. 

The Commission understands that the existing arrangement has effectively enabled the 
United  Kingdom  to  simplify  the  charging  of  the  tax  over  the  years  and  that  the  new 

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system, which will continue to be optional for taxpayers, will have a similar effect. The 
United Kingdom has also explained that a charge geared to a higher number of bands 
based  on  CO2  emissions  will  more  accurately  reflect  private  consumption  than  the 
existing bands based on engine sizes and types of fuel.  

The  Commission  therefore  considers  it  appropriate  for  the  United  Kingdom  to  be 
authorised to apply the altered special measure. 

In  this  context,  the  initial  Council  Decision  86/356/EEC  will  have  to  be  abolished. 
However, in order to allow a smooth transition, this Decision will only be repealed on 
30  April  2007  and,  in  any  case,  not  later  than  the  entry  into  force  of  the  relevant 
national measures. 

•  Existing provisions in the area of the proposal 

Council  Decision  86/356/EEC  of  21  July  1986  authorising  the  United  Kingdom  to 
apply  flat-rate  measures  in  respect  of  the  non-deductible  value  added  tax  charged  on 
fuel expenditure in company cars. 

•  Consistency with other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

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•  Consultation of interested parties 

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Not relevant. 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

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The proposed Decision relates to simplification measures for the charging of VAT on 
fuel  for  business  cars  in  the  United  Kingdom  and  has  therefore  a  potential  positive 
economic impact. 

Impact will in any case be limited because of the narrow scope of the derogation. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

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•  Summary of the proposed action 

Authorisation for the United Kingdom to derogate from Articles 5(6) and 11(A)(1)(b) 
of  the  Sixth  Council  Directive  77/388/EEC  in  order  to  apply  special  measures  for 
determining  the  proportion  of  VAT  relating  to  expenditure  on  fuel  used  for  private 
purposes in business cars on the basis of CO2 emissions. 

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•  Legal basis 

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Article  27(1)  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. 

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•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s). 

This Decision concerns an authorisation granted to a Member State on its own request 
and does not constitute any obligation. 

Given the limited scope of the derogation, the special measure is proportionate to the 
aim pursued. 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s). 

Under Article 27 of the Sixth Council Directive 77/388/EEC on the harmonisation of 
the laws of the Member States relating to turnover taxes, derogation from the common 
VAT  rules  is  only  possible  on  the  authority  of  the  Council  acting  unanimously  on  a 
proposal  from  the  Commission.  A  Council  Decision  is  the  only  suitable  instrument 
since it can be addressed to an individual Member State. 

4)  BUDGETARY IMPLICATION 

The proposal has no implications for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  Repeal of existing legislation 

The adoption of the proposal will lead to the repeal of existing legislation. 

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•  Review/revision/sunset clause 

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The proposal includes a sunset clause. 

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Proposal for a 

COUNCIL DECISION 

authorising the United Kingdom to introduce a special measure derogating from 
Articles 5(6) and 11(A)(1)(b) of Directive 77/388/EEC on the harmonisation of the laws 
of the Member States relating to turnover taxes 

(Only the English text is authentic) 

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 assessment1, and in particular Article 27(1) thereof, 

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

(2) 

(3) 

By letter registered by the Secretariat-General of the Commission on 7 April 2005, the 
United  Kingdom  requested  authorisation  to  derogate  from  Articles  5(6)  and 
11(A)(1)(b) of Directive 77/388/EEC. 

In accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed 
the other Member States by letter dated 26 October 2005 of the request made by the 
United  Kingdom.  By  letter  dated  27  October  2005,  the  Commission  notified  the 
United Kingdom that it had all the information it considered necessary for appraisal of 
the request.  

The  United  Kingdom  wishes  to  replace  the  derogation,  provided  for  by  Council 
Decision 86/356/EEC of 21 July 1986 authorizing the United Kingdom to apply flat-
rate  measures  in  respect  of  the  non-deductible  value  added  tax  charged  on  fuel 
expenditure  in  company  cars3,  which  authorised  special  simplification  measures  in 
order to determine on a flat-rate basis the proportion of value added tax (VAT) relating 
to expenditure on fuel in business cars partly used for private purposes. This procedure 
relieves  taxable  persons  of  the  need  to  keep  detailed  mileage  records  in  order  to 
calculate,  for  each  car,  the  exact  amount  of  VAT  related  to  private  and  business 
motoring.  Like  this  system,  the  proposed  new  system  will  be  optional  for  taxable 
persons. 

1 

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3 

OJ L 145, 13.6.1977, p. 1. Directive as last amended by Directive 2006/18/EC (OJ L 51, 22.2.2006, p. 
12). 
OJ C , , p. . 
OJ L 212, 2.8.1986, p. 35. 

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(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

The current system is based on the type of fuel used and the engine size of the car. The 
United  Kingdom  wishes  to  amend  this  system  and  base  it  on  the  level  of  carbon 
dioxide  (CO2)  emissions  from  the  car,  as  there  is  a  proportional  correlation  between 
emissions  and  fuel  consumption  and  therefore  with  expenditure  on  fuel.  This  means 
that a flat-rate scale system based on CO2 emissions could achieve the same objective 
of  taxing  fuel  expenditure  incurred  by  a  business  for  private  motoring.  At  the  same 
time, the United Kingdom also expects to achieve greater accuracy in determining the 
charge  for  private  consumption  by  increasing,  and  therefore  refining,  the  number  of 
scale bands in comparison with the existing bands. 

This  arrangement  has  effectively  enabled  the  United  Kingdom  to  simplify  the 
procedure for charging tax in relation to expenditure on fuel for business cars and the 
proposed  system,  based  on  CO2  emissions,  will  have  a  similar  effect.  Private 
consumption should be more accurately reflected under the new system. 

The  authorisation  should  be  limited  in  time,  so  that  in  the  light  of  the  experience 
gained up to that date an assessment may be made as to whether or not the derogation 
is still justified.  

Decision 86/356 should be repealed after a certain period but in any case at the entry 
into force of the national provisions introducing the new special measure, in order to 
avoid a situation in which authorisations for both systems exist at the same time. 

The  United  Kingdom  should  inform  the  Commission  of  the  national  provisions 
introducing  the  new  special  measure  as  soon  as  they  have  been  adopted  and  should 
ensure that this measure will not enter into force before 30 April 2007. 

The  derogation  has  no  negative  impact  on  the  Community's  own  resources  accruing 
from VAT, 

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Articles  5(6)  and  11(A)(1)(b)  of  Directive  77/388/EEC,  the 
United Kingdom is authorised, from 1 May 2007 until 31 December 2015, to fix on a flat-rate 
basis  the  proportion  of  value  added  tax  relating  to  expenditure  on  fuel  used  for  private 
purposes in business cars. 

Article 2 

The  proportion  of  the  tax  referred  to  in  Article  1  shall  be  expressed  in  fixed  amounts, 
established  on  the  basis  of  the  CO2  emissions  level  of  the  type  of  vehicle,  that  reflect  fuel 
consumption.  The  United  Kingdom  shall  adjust  these  fixed  amounts  annually  to  reflect 
changes in the average cost of fuel. 

The system set up on the basis of this Decision shall be optional for taxable persons. 

Article 3 

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Council Decision 86/356 is repealed on 30 April 2007. 

Article 4 

The  United  Kingdom  shall  inform  the  Commission  of  the  national  provisions  referred  to  in 
Article 1 as soon as they have been adopted. 

Article 5 

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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