Proposal for a Council Decision authorising the United Kingdom to continue to apply a measure derogating from Articles 26(1)(a), 168 and 169 of Directive 2006/112/EC on the common system of value added tax (Only the English version is authentic)
Date: 2007-11-26
Institutions: European Commission
Subjects: United Kingdom, VAT, derogation from EU law, hire purchase, hiring, motor car, tax harmonisation, tax relief, tourism

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 26.11.2007 
COM(2007) 752 final 

Proposal for a 

COUNCIL DECISION 

authorising the United Kingdom to continue to apply a measure derogating from 
Articles 26(1)(a), 168 and 169 of Directive 2006/112/EC on the common system of value 
added tax 

(Only the English version 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  395(1)  of  Directive  2006/112/EC  of  28  November  2006  on  the 
common  system  of  value  added  tax  (VAT),  the  Council,  acting  unanimously  on  a 
proposal  from  the  Commission,  may  authorise  any  Member  State  to  apply  special 
measures for derogation from the provisions of that Directive, in order to simplify the 
procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance. 

By  letter  registered  with  the  Secretariat-General  of  the  Commission  on  5  February 
2007,  the  United  Kingdom  requested  authorisation  to  continue  to  apply  a  derogating 
measure as first granted by Council Decision 95/252/EC of 29 June 1995 and then by 
Council  Decision  98/198/EC  of  9  March  1998  (as  amended).  In  accordance  with 
Article 395(2) of Directive 2006/112/EC, the Commission informed the other Member 
States by letter dated 15 October 2007 of the request made by the United Kingdom. By 
letter dated 17 October, the Commission notified the United Kingdom that it had all the 
information necessary to consider the request. 

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•  General context 

The  above-mentioned  Council  Decisions  authorised  the  United  Kingdom  to  apply  a 
restriction of the right to deduct to 50% of the input VAT incurred on the hire or lease 
of passenger cars used by taxable persons for both business and private use and, at the 
same  time, not to  consider the private use by taxable persons of such leased or hired 
cars as supplies of services for consideration. This derogation removes the need for the 
hirer or the lessee to keep detailed private mileage records for each of these cars and to 
account for the VAT on the private use. The derogation is therefore essentially to be 
considered as a simplification measure. The derogation has been renewed several times 
and is due to expire on 31 December 2007. 

As  a  rule,  derogations  are  granted  for  a  limited  time  so  as  to  allow  an  assessment 
whether  the  special  measure  is  appropriate  and  effective.  In  this  respect,  the 
Commission  understands,  on  the  basis  of  the  information  available,  that  the  50% 
apportionment between business and private use (or any other non-business use within 
the  meaning  of  Article  26(1)(a)  of  Directive  2006/112/EC)  currently  still  reflects  the 
overall  business  and  private  use  of  leased  and  hired  cars  by  taxable  persons  in  the 
United  Kingdom.  Therefore,  the  legal  and  factual  circumstances  which  justified  the 
original derogation are still relevant. 

However,  on  29  October  2004,  the  Commission  presented  a  proposal  for  a  Council 
Directive  that  includes  a  harmonisation  of  the  categories  of  expenses  for  which 
Member  States  may  apply  exclusions  to  the  right  to  deduct  (the  so-called  VAT 
simplification proposal (COM(2004)728 final)). As expenses in relation to motor cars 
are  included  in  this  proposal,  any  extension  in  the  period  of  validity  should  not  go 
beyond adoption and entry into force of the proposed Directive. The derogation should 
in  any  case  be  limited  to  31  December  2010  in  case  the  proposed  Directive  has  not 
come into force by that date, in order to be able to assess whether the 50% restriction is 

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still  a  reasonable  and  acceptable  reflection  of  the  overall  apportionment  between 
business and private use. 

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•  Existing provisions in the area of the proposal 

Council  Decision  98/198/EC  of  9  March  1998  authorising  the  United  Kingdom  to 
extend  the  application  of  a  measure  derogating  from  Articles  6  and  17  of  the  Sixth 
Council  Directive  (77/388/EEC)  on  the  harmonisation  of  the  laws  of  the  Member 
States  relating  to  turnover  taxes  (OJ  L  76,  13.3.1998,  p.  31).  Decision  amended  by 
Council  Decision  99/79/EC  of  18  January  1999  (OJ  L  27,  2.2.1999,  p.  22),  Council 
Decision  2000/747/EC  of  27  November  2000  (OJ  L  302,  1.12.2000,  p.  63),  Council 
Decision  2003/909/EC  of  22  December  2003  (OJ  L  342,  30.12.2003,  p.  49)  and 
Council Decision 2004/855/EC of 7 December 2004 (OJ L 369, 16.12.2004, p. 61). 

Article  176  of  Directive  2006/112/EC  stipulates  that  the  Council  shall  determine  the 
expenditure on which the VAT is not deductible. Until such time, it authorises Member 
States  to  maintain  exclusions  which  were  in  place  on  1  January  1979.  There  are 
therefore a number of "stand still" provisions restricting the right to deduct in relation 
to motor vehicles. 

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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  Decision  proposal  aims  at  extending  in  time  a  simplification  measure  which 
removes the need for the taxable person to keep records of and to account for VAT on 
private  mileage  travelled  in cars  operated  by  a  business  and  has  therefore  a  potential 
positive economic impact. 

However, because of the narrow scope of the derogation and the limited application in 
time,  the  impact  will  in  any  case  be  limited.  Moreover,  the  measure  is  similar  in 
approach to the Commission's proposal found in COM(2004) 728 final, which contains 
rules  on  which  forms  of  expenditure  may  be  subject  to  a  restriction  on  the  right  to 
deduct. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

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•  Summary of the proposed action 

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Authorisation for the United Kingdom to continue to apply a derogating measure from 
Directive 2006/112/EC as regards the restriction of the right of deduction to 50% of the 
input VAT incurred on the hire or lease of motor cars not exclusively used for business 
purposes.  Where  the  right  to  deduct  has  been  limited,  the  taxable  person  is  relieved 
from accounting for VAT on the private use of the vehicle. The Decision will expire on 
the  earlier  of  the  date  specified  in  the  Decision  or  on  the  date  on  which  Community 
rules come into force governing restrictions on the right to deduct in this area. 

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•  Legal basis 

Article 395 of the VAT Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax. 

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•  Subsidiarity principle 

In  accordance  with  Article  395  of  the  VAT  Directive,  the  proposed  measure,  which 
authorises a Member State to derogate from provisions of the same Directive, must be 
adopted by the Council on a proposal from the Commission. Therefore, the proposed 
measure can only be adopted at the Community level. 

•  Proportionality principle 

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

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

Given the very 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  395  of  the  VAT  Directive,  derogation  from  the  common  VAT  rules  is 
only possible with the authorisation of the Council acting unanimously on a proposal 
from the Commission. A Council Decision is the most suitable instrument since it can 
be addressed to individual Member States. 

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4)  BUDGETARY IMPLICATION 

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The proposal has no implication for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  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 continue to apply a measure derogating from 
Articles 26(1)(a), 168 and 169 of Directive 2006/112/EC on the common system of value 
added tax 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax1 (VAT), and in particular Article 395(1) thereof, 

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

(2) 

(3) 

By Council Decision 95/252/EC3 and subsequently by Council Decision 98/198/EC4, 
the Council authorised the United Kingdom to restrict to 50% the right of the hirer or 
lessee to deduct input VAT on charges for the hire or lease of a passenger car where 
the  car  is  not  used  entirely  for  business  purposes.  The  United  Kingdom  was  also 
allowed  not  to  treat  as  supplies  of  services  for  consideration  the  private  use  of  a  car 
hired  or  leased  by  a  taxable  person  for  his  business  purposes.  This  simplification 
measure removed the need for the hirer or the lessee to keep records of private mileage 
travelled in business cars and to account for tax on the actual private mileage of each 
car. 

By  letter  registered  with  the  Secretariat-General  of  the  Commission  on  5  February 
2007,  the  United  Kingdom  requested  an  extension  of  the  period  of  validity  of  that 
derogation, which expires on 31 December 2007. 

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed the other Member States by letter dated 15 October 2007 of the request made 
by the United Kingdom. By letter dated 17 October 2007, the Commission notified the 
United Kingdom that it had all the information necessary to consider the request. 

(4) 

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

1 OJ L 347, 11.12.2006, p. 1. Directive amended by Directive 2006/138/EC (OJ L 384, 29.12.2006, p. 92). 
2 OJ C, , p. 
3 OJ L 159, 11.7.1995, p. 19. 
4 OJ L 76, 13.3.1998, p. 31. Directive as last amended by Directive 2004/855/EC (OJ L 369, 16.12.2004, p. 61). 

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(5) 

On  29  October  2004,  the  Commission  presented  a  proposal  for  a  Council  Directive 
amending  Directive  77/388/EEC,  now  Directive  2006/112/EC,  that  includes  the 
harmonisation of the categories of expenses for which exclusions of the right to deduct 
may apply5. Under this proposal, exclusions to the right to deduct may be applied to 
motorised  road  vehicles.  It  is  therefore  appropriate  to  extend  the  period  of  the 
authorisation until that Directive comes into force. However, the authorisation will in 
any case expire on 31 December 2010 at the latest if that Directive has not come into 
force by that date, to enable an assessment of the necessity of this Decision in the light 
of the percentage of the overall apportionment between business and private use. 

(6) 

The  extension  in  time  of  the  derogation  will  not  have  an  adverse  effect  on  the 
European Communities' own resources accruing from VAT. 

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Articles  168  and  169  of  Council  Directive  2006/112/EC,  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 the hiring or leasing of that car where it is not used entirely 
for business purposes. 

Article 2 

By  way  of  derogation  from  Article  26(1)(a)  of  Council  Directive  2006/112/EC,  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. 

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 
VAT, but on 31 December 2010 at the latest. 

Article 4 

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

Done at Brussels,  

For the Council 
The President 

5 COM(2004) 728 final 

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