Proposal for a Council Decision authorising Estonia, Slovenia, Sweden and the United Kingdom to apply a special measure derogating from Article 17(1) of the Sixth Council Directive 77/388/EEC on the harmonization of the laws of the Member States relating to turnover taxes
Date: 2006-12-14
Institutions: European Commission
Subjects: Estonia, Slovenia, Sweden, United Kingdom, VAT, approximation of laws, derogation from EU law, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.12.2006 
COM(2006) 802 final 

Proposal for a 

COUNCIL DECISION 

authorising Estonia, Slovenia, Sweden and the United Kingdom to apply a special 
measure derogating from Article 17(1) 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) 

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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  harmonization  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  26  January 
2006,  the  United  Kingdom  requested  an  extension  of  an  existing  derogation  from 
Article  17(1)  of  Directive  77/388/EEC.  The  derogation  authorised  the  United 
Kingdom, to postpone the right of VAT deduction until it had been paid to the supplier. 

By  letters  registered  with  the  Secretariat-General  of  the  Commission  on  31  August 
2006 from Estonia, on 27 June 2006 from Slovenia and on 6 April 2006 from Sweden, 
requests  were  made  for  a  derogation  from  Article  17(1)  of  Directive  77/388/EEC  to 
postpone the right of VAT deduction until it has been paid to the supplier. 

In accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed 
the  other  Member  States  by  letter  dated  6  October  2006  of  the  request  made  by 
Estonia, by letter dated 6 October 2006 of the request made by Slovenia, by letter dated 
4 October 2006 of the request made by Sweden and by letter dated 6 October 2006 of 
the  request  made  by  the  United  Kingdom.  By  letter  dated  6  October  2006  the 
Commission  notified  Sweden  and  by  letter  dated  9  October  2006  the  Commission 
notified  Estonia,  Slovenia  and  the  United  Kingdom,  that  it  had  all  the  information  it 
considered necessary for the appraisal of their request. 

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•  General context 

The United Kingdom has an optional simplified scheme (cash accounting) for taxable 
persons  whose  turnover  does  not  exceed  GBP  660  000  (approximately  €964  000). 
Under  this  scheme,  eligible  taxable  persons  are  permitted,  pursuant  to  the  third 
subparagraph of Article 10(2) of Directive 77/388/EEC, to defer payment of tax until 
receipt of payment. At the same time, and by way of derogation from Article 17(1) of 
Directive 77/388/EEC, input tax may not be deducted by the taxable persons that have 
opted for the simplified scheme until it has been paid to the supplier. 

The  United  Kingdom  obtained  the  authorisation  to  derogate  from  Article  17(1)  of 
Directive  77/388/EEC  on  the  basis  of  Council  Decision  87/400/EEC.  This  Decision 
limited  the  use  of  the  cash  accounting  scheme  only  to  taxable  persons  of  which  the 
annual  turnover  was  less  than  ECU  340  000.  As  the  derogation  was  extended  with 
Council  Decisions  90/497/EEC,  93/111/EEC,  97/375/EC,  2000/435/EC  and 
2003/909/EC, also the turnover limit was gradually increased up to its current amount 
of GBP 660 000.  

In the current request for derogation, the United Kingdom requested that the turnover 

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limit  for  the  cash  accounting  scheme  would  be  increased  to  GBP  1  350  000 
(approximately €2 000 000). This would double the existing turnover limit.  

According  to  the  United  Kingdom,  the  cash  accounting  scheme  is  part  of  a  series  of 
simplification  measures  which  aim  to  aid  small  and  medium  sized  businesses.  The 
potential number of businesses entitled to use the cash accounting scheme is around 1 
million  and  the  number  of  companies  who  could  derive  benefit  from  the  scheme  is 
around  750  000.  Of  these  businesses,  159  000  are  actually  using  the  scheme.  The 
increase in the turnover limit would make an additional 57 000 companies eligible to 
use the scheme.  

The  current  derogation  is  valid  until  31  December  2006.  The  United  Kingdom 
requested that an extension of the derogation be permitted until 31 December 2009.  

The Commission considers that the request of the United Kingdom is acceptable both 
as to the increase of the turnover limit as well as to the duration of the derogation. The 
optional  cash  accounting  scheme  has  been  in  use  in  the  United  Kingdom  since 
1 October  1987.  The  requested  increase  in  the  turnover  limit  does  not  bring  any 
changes to the scheme. 

Estonia,  Slovenia  and  Sweden  are  also  requesting  a  derogation  from  Article  17(1)  of 
Directive  77/388/EEC  for  use  with  an  optional  simplified  scheme  (cash  accounting). 
Like  the  United  Kingdom  scheme,  eligible  taxable  persons  would  be  permitted, 
pursuant to the third subparagraph of Article 10(2) of Directive 77/388/EEC, to defer 
payment  of  the  tax  until  the  receipt  of  payment.  At  the  same  time,  and  by  way  of 
derogation  from  Article  17(1)  of  Directive  77/388/EEC,  input  tax  would  not  be 
deducted by the taxable persons that have opted for the simplified scheme until it has 
been paid to the supplier. The details of the scheme including the rules for admission 
and  withdrawal,  and  the  specific  accounting  requirements  will  be  set  by  the  Member 
States themselves. 

For Slovenia the threshold would be set at 50 000 000 tolars (approximately €208 000). 
Of the 62 000 businesses that could opt to use the scheme, it is expected that about 1 
000 would do so. 

In  the  case  of  Sweden,  the  threshold  would  be  set  at  SEK  3  000  000  (approximately 
€300  000).  This  would  allow  about  630  000  businesses  to  opt  to  use  the  scheme  of 
which an estimated 60%, or 400 000 businesses, are likely to opt to use the scheme.  

Both  the  Slovenian  and  Swedish  derogation  requests  follow  the  existing  United 
Kingdom derogation and its proposed renewal. As such, the Commission can support 
the derogation requests which aim to simplify the procedures for small businesses.  

The  rules  for  the  optional  simplified  scheme  (cash  accounting)  are  not  limited  by  a 
turnover threshold for Estonia. Its use is instead restricted to taxable persons classified 
under  Estonian  law  as  sole  proprietors,  of  which  there  are  approximately  5  700 
registered for VAT. These businesses are allowed to declare their income for direct tax 
purposes  under  cash  based  accounting  rules.  It  would,  therefore,  simplify  accounting 
obligations for these businesses to be allowed to declare VAT on a cash basis as well. 
Given  the  small  number  of  businesses  to  which  the  scheme  will  apply  and  the 
simplification  benefits  that  it  offers,  the  Commission  can  support  this  derogation 

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request. 

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•  Existing provisions in the area of the proposal 

Council Decision 97/375/EC of 9 June 1997 authorising the United Kingdom to apply 
an  optional  measure  derogating  from  Article  17(1)  of  the  Sixth  Council  Directive 
(77/388/EEC)  on  the  harmonization  of  the  laws  of  the  Member  States  relating  to 
turnover  taxes.  The  Council  Decision  has  been  amended  by  Council  Decisions 
2000/435/EC of 29 June 2000 and 2003/909/EC of 22 December 2003 and expires on 
31 December 2006. 

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•  Consistency with the other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  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 for 
small and medium sized businesses and will potentially improve the cash flow situation 
of the businesses concerned. 

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  continue  to  derogate,  and  for  Estonia, 
Slovenia  and  Sweden  to  be  allowed  to  derogate,  from  Article  17(1)  of  the  Sixth 
Council  Directive  77/388/EEC  in  order  to  apply  an  optional  cash  accounting  scheme 
under  which  a  taxable  person  must  postpone  the  VAT  deduction  until  the  goods  or 
services have actually been paid to the supplier. 

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•  Legal basis 

Article  27(1)  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.  

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•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 

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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  their  own 
request and does not constitute an 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 harmonization of 
the laws of the Member States relating to turnover taxes, derogating 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 implication 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 Estonia, Slovenia, Sweden and the United Kingdom to apply a special 
measure derogating from Article 17(1) 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(1) thereof, 

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

Council Decision 97/375/EC3 authorises the United Kingdom, in accordance with the 
procedure laid down in Article 27 of Directive 77/388/EEC, to apply a special measure 
derogating  from  Article  17(1)  of  the  said  Directive  in  order  to  operate  an  optional 
scheme  in  which  tax  is  accounted  for  on  the  basis  of  cash  paid  and  received  (cash 
accounting). Under that cash accounting scheme, the right of deduction of input VAT 
of taxable persons, who account for the output VAT for their supplies when they have 
received the payment of the price from their customers, pursuant to the second indent 
of the third subparagraph of Article 10(2) of the said Directive, may be postponed by 
the UK, by way of derogation from Article 17(1) of the said Directive, until the input 
VAT has been paid to the supplier. 

(2) 

By letter registered by the Secretariat-General of the Commission on 26 January 2006, 
the  United  Kingdom  requested  an  extension  of  three  years  of  that  derogation  from 
Article  17(1)  of  Directive  77/388/EEC.  The  United  Kingdom  also  requested  for  the 
turnover  limit  for  the  simplified  cash  accounting  scheme  to  be  increased  from  GBP 
660 000 to GBP 1 350 000. 

(3) 

By letter registered by the Secretariat-General of the Commission on 31 August 2006, 
Estonia  requested  a  derogation  from  Article 17(1)  of  Directive  77/388/EEC  to  allow 

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OJ L 145, 13.6.1977, p. 1. Directive as last amended by Directive 2006/69/EC (OJ L 221, 12.8.2006, 
p. 9). 
OJ C , , p. . 
OJ L 158, 17.6.1997, p. 43. Decision as last amended by Decision 2003/909/EC (OJ L 342, 30.12.2003, 
p. 49) 

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the VAT to become deductible by the taxable person when the supplier is paid. This 
postponement of deduction will apply only under a simplified cash accounting scheme 
under which taxable persons account for the output VAT for their supplies when they 
have received payment from their customers, pursuant to the second indent of the third 
subparagraph  of  Article  10(2)  of  the  said  Directive.  Estonia  requested  that  the  cash 
accounting  scheme  be  limited  to  taxable  persons  classified  as  sole  proprietors  under 
Estonian law. 

By  letter  registered  by  the  Secretariat-General  of  the  Commission  on  27  June  2006, 
Slovenia requested a derogation from Article 17(1) of Directive 77/388/EEC to allow 
the VAT to become deductible by the taxable person when the supplier is paid. This 
postponement of deduction will apply only under a simplified cash accounting scheme 
under which taxable persons account for the output VAT for their supplies when they 
have received payment from their customers, pursuant to the second indent of the third 
subparagraph  of  Article  10(2)  of  the  said  Directive.  Slovenia  requested  that  the 
turnover limit for their simplified cash accounting scheme be set at SIT 50 000 000. 

By  letter  registered  by  the  Secretariat-General  of  the  Commission  on  6  April  2006, 
Sweden requested a derogation from Article 17(1) of Directive 77/388/EEC to allow 
the VAT to become deductible by the taxable person when the supplier is paid. This 
postponement of deduction will apply only under a simplified cash accounting scheme 
under which taxable persons account for the output VAT for their supplies when they 
have received payment from their customers, pursuant to the second indent of the third 
subparagraph  of  Article  10(2)  of  the  said  Directive.  Sweden  requested  that  the 
turnover limit for their simplified cash accounting scheme be set at SEK 3 000 000. 

In accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed 
the  other  Member  States  by  letter  dated  6  October  2006  of  the  request  made  by 
Estonia,  by  letter  dated  6  October  2006  of  the  request  made  by  Slovenia,  by  letter 
dated  4  October  2006  of  the  request  made by  Sweden  and  by  letter  dated  6  October 
2006 of the request made by the United Kingdom. By letter dated 6 October 2006 the 
Commission  notified  Sweden  and  by  letters  dated  9  October  2006  the  Commission 
notified Estonia, Slovenia and the United Kingdom,  that  it  had  all  the  information  it 
considered necessary for the appraisal of their request.  

The cash accounting scheme is a simplification measure for small and medium sized 
businesses.  Regarding  the  United  Kingdom,  raising  the  ceiling  for  the  simplified 
scheme will allow a greater number of firms to opt for the scheme. The increase of the 
turnover  limit  would  extend  the  scheme  to  a  potential  additional  57  000  businesses. 
The  derogation  requested  by  Estonia  will  allow  5  700  businesses  to  use  the  cash 
accounting scheme. In the case of Slovenia, 62 000 businesses will be able to opt for 
the use of the cash accounting scheme. As for Sweden, the scheme will be available to 
630 000 businesses. 

The Estonian, Slovenian, Swedish and United Kingdom derogations can be accepted 
in  view  of  the  percentage  of  eligible  businesses  that  could  opt  for  this  simplified 
scheme and the limited duration. 

The derogation in question does not affect the overall amount of the tax revenue of the 
Member States collected at the stage of final consumption and as a consequence does 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

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not  have  a  negative  effect  on  the  own  resources  of  the  European  Communities 
accruing from VAT.  

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Article  17(1)  of  the  Sixth  Council  Directive  (77/388/EEC), 
Estonia,  Slovenia,  Sweden  and  the  United  Kingdom  are  authorised  to  postpone  the  right  of 
deduction of the input tax of the taxable persons, as defined in the second paragraph, until the 
input tax has been paid to their suppliers. 

The taxable persons concerned must use a scheme whereby they account for the output VAT 
for  their  supplies  when  they  have  received  the  payments  from  their  customers.  They  must 
have  an  annual  turnover  not  higher  than  SIT  50  000  000  for  Slovenia,  SEK  3  000  000  for 
Sweden  and  GBP  1  350  000  for  the  United  Kingdom,  or,  in  the  case  of  Estonia,  must  be 
registered as a sole proprietor. 

Decision 97/375/EC is repealed. 

Article 2 

Article 3 

This Decision shall expire on 31 December 2009. 

Article 4 

This Decision is addressed to the Republic of Estonia, the Republic of Slovenia, the Kingdom 
of Sweden and the United Kingdom of Great Britain and Northern Ireland. 

Done at Brussels,  

For the Council 
The President 

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