Proposal for a Council Decision amending Council Decision 2007/250/EC authorising the United Kingdom to introduce a special measure derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax (only the English version is authentic)
Date: 2009-04-21
Institutions: European Commission
Subjects: United Kingdom, VAT, delivery, derogation from EU law, electronic component, mobile phone

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.4.2009 
COM(2009) 183 final 

Proposal for a 

COUNCIL DECISION 

amending Council Decision 2007/250/EC authorising the United Kingdom to introduce a 
special measure derogating from Article 193 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 

Pursuant  to  Article  395  of  Directive  2006/112/EC  of  28  November  2006  on  the 
common system of value added tax1 (hereafter: 'VAT Directive'), 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  value  added  tax  (VAT)  or  to  prevent 
certain forms of tax evasion or avoidance. 

By letter registered with the Secretariat-General of the Commission on 28 July 2008, 
the  United  Kingdom  requested  authorisation  to  extend  a  derogating  measure, 
previously granted by Council Decision 2007/250/EC of 16 April 20072. 

In accordance with Article 395(2) of the VAT Directive, the Commission informed 
the other Member States by letter dated 17 March 2009 of the request made by the 
United  Kingdom.  By  letter  dated  20  March  2009,  the  Commission  notified  the 
United Kingdom that it had all the information necessary to consider the request in 
the way set out below. 

Under Council Decision 2007/250/EC, the United Kingdom was authorised, until 30 
April  2009,  to  apply  a  reverse  charge  mechanism  in  relation  to  certain  supplies, 
where the taxable amount was equal to or higher than GBP 5 000, of mobile phones 
and  integrated  circuit  devices.  Under  these  circumstances,  the  taxable  person,  to 
whom the supplies of the goods were made, became liable to account for the VAT on 
the  supply.  This  resulted  in  the  supplier  of  the  goods  not  charging  the  VAT  to  his 
customer in so far the customer qualified as a taxable person for VAT purposes. Such 
a customer, provided he had a full right of deduction, would simultaneously declare 
and  deduct  the  VAT  corresponding  to  the  supply;  thus  leading  to  no  effective 
payment of VAT to the Treasury. It would therefore be the retailer, supplying to non-
taxable clients, who would actually pay the full amount of VAT to the Treasury. This 
situation derogated from the general VAT fractioned payment system whereby each 
taxable person (with a right of deduction) in the chain pays a part of the total VAT 
amount  to  the  Treasury  amounting  to  the  difference  between  the  VAT  amount 
received from the client and the VAT amount paid to his supplier. 

This derogation had been requested by the United Kingdom in order to deal with tax 
fraud  of  suppliers  who,  under  the  normal  regime,  charge  VAT  and  then  disappear 
without accounting for the VAT due, but leaving the customer with a valid invoice 
for deduction. This had evolved into Missing Trader Intra-Community fraud (MTIC), 
abusing  the  VAT  system  of  exempt  supplies  in  the  Member  State  of  departure  to 
taxable  customers  in  another  Member  State,  and  even  into  carousel  fraud  in  which 
the goods circulate a number of times between Member States. 

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OJ L 347, 11.12.2006, p. 1  
OJ L 109, 26.4.2007, p. 42 

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It is against this background, and after having demonstrated the historical seriousness 
of problem in the United Kingdom, that a derogation was granted to apply a reverse 
charge  procedure  at  a  set  threshold  of  GBP  5 000  and  for  a  limited  number  of 
products, which are most subject to fraud, in an attempt to remove fraud possibilities 
for potential missing traders as no VAT would be charged. 

However, the derogation, aiming at preventing certain types of tax evasion or fraud 
and  which  led  to  additional  compliance  burdens,  was  subject  to  several  conditions 
and  only  granted  for  a  short  period,  as  it  could,  according  to  the  eighth  recital  of 
Council Decision 2007/250/EC, not be ascertained with certainty that the objectives 
of the measure would be achieved.  

Questions were raised as regards the possible impact of the measure on fraud being 
shifted to other products or to the retail level. In this  respect, the Council Decision 
obliged  the  United  Kingdom  to  introduce  appropriate  control  and  reporting 
obligations  as  to  guarantee  that  the  necessary  information  would  be  available  and 
inform  the  Commission  of  these  specific  measures  and  of  the  monitoring  and  the 
overall  evaluation.  Doubts  also  existed  as  regards  the  effect  of  the  measure  on  the 
possible shifting of fraud to other Member States and therefore of the functioning of 
the VAT system in the internal market. This impact had to be assessed properly. 

In this context, the United Kingdom was furthermore required to submit a report by 
31 March 2009 to the Commission on the overall evaluation of the operation of the 
measures concerned and in particular as regards the effectiveness of the measure and 
any evidence of shifting of tax evasion to other products or to the retail level. 

However,  the  United  Kingdom  was,  at  the  time  the  request  for  a  renewal  of  the 
derogation,  not  in  a  position  to  provide  the  necessary  information  and  justification 
and in particular not able to specify to which extent the derogation might have led to 
a reduction on the missing trader or carousel fraud in relation to the products covered 
by  the  derogation.  In  fact,  a  substantial  reduction  of  such  fraud  had  already  been 
observed  before  reverse  charge  had  been  introduced.  Substantial  evaluation  of 
possible shifting to the retail sector or to other Member States is, so far, also lacking 
while, at the same time, it is acknowledged that the deadline for the United Kingdom 
to  submit  the  report  was  fixed  at  31st  of  March  2009.  In  the  Commission's 
understanding, the report should be made available to all other Member States. 

The United Kingdom has argued that more time would be needed in order to be in a 
position  to  allow  for  a  better  assessment  of  the  measure  as  to  its  successfulness  to 
combat  MTIC  and  carousel  fraud  going  beyond  the  theoretical  argument  that  is 
already set out in the Commission Communication on  possible measures to  change 
the  VAT  system  to  fight  fraud3.  The  United  Kingdom  has  not  proposed  evaluation 
criteria  that  would  support  such  statement.  It  should,  however,  be  noted  that  in  the 
original proposal of the previous derogation4, the Commission proposed an end date 
of 31 December 2009 but the Council,  anxious to shorten  the  application period of 
the derogation because of the possible negative impact, finally unanimously agreed 
on an end date of 30 April 2009. 

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COM(2008) 109 final, 22.2.2008 
COM(2006) 555 final, 28.9.2006 

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In  order  to  provide  the  United  Kingdom  a  final  opportunity  to  better  justify  their 
request  to  extend  the  current  derogation  over  a  longer  period,  the  Commission  had 
the intention to re-iterate its original proposal and thus to propose a prolongation of 
the measure until 31 December 2009. However, the ECOFIN Council of 10 March 
2009 reached a political agreement to extend the current derogation even beyond the 
end of this year and finally agreed on an extension of two years until 30 April 2011. 

This extension is not to be understood as a basis for any further prolongation of the 
measure  which  otherwise,  in  time,  would  become  almost  permanent.  The 
Commission  is,  however,  willing  to  examine  the  possibility  of  allowing  a  pilot 
project on a similar targeted use of the reverse charge mechanism by any interested 
Member State, including the United Kingdom, on the basis of a legislative proposal 
to amend the VAT Directive in this respect. In view of the uncertainty of the effects 
of  the  measure,  its  derogation  from  one  of  the  fundamental  principles  of  the  VAT 
system,  which  is  the  fractioned  payment,  the  creation  of  a  specific  legal  basis  for 
such a pilot appears to be the only possible way forward in the medium term and in 
line with the principles spelled out in the Commission's Communication on possible 
measures  to  change  the  VAT  system  to  fight  fraud5.  With  predefined  evaluation 
criteria,  such  a  pilot  could  produce  the  so  far  lacking  assessment  of  the  usefulness 
and proportionality of a sector-targeted application of reverse charge. Nevertheless, 
in  view  of  the  upcoming  elections  for  the  European  Parliament,  it  would  not  be 
possible  to  have  such  a  proposal  adopted  by  the  Council  before  the  end  of  2009, 
which could leave a legal gap for the application of the measure by the UK. These 
very  exceptional  factual  circumstances  provide  additional  grounds  to  prolong  the 
deadline until 30 April 2011 unless the aforementioned proposal for a Directive was 
adopted earlier.  

2. 

CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

There was no need for consultation or external expertise. 

The  prolongation  of  Council  Decision  2007/250/EC  aims  at  combating  VAT  fraud 
and  evasion  and  is  likely  to  have  a  positive  impact  on  VAT  receipts  in  the  UK.  It 
was, however, during the previous application period of the derogation, not possible 
for the United Kingdom to clearly demonstrate that the fraud had been eliminated or 
decreased because of the derogation. The prolongation for a short time should allow 
for a proper justification of the extension request. 

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

The  Decision  amends  Council  Decision  2007/250/EC  authorising  the  United 
Kingdom  to  introduce  a  special  measure  derogating  from  Article  193  of  the  VAT 
Directive as regards the use of a reverse charge mechanism for domestic supplies of 
mobile phones and integrated circuit devices. 

This Decision is based on Article 395 of the VAT Directive. 

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COM(2008) 109final, 22.2.2008 

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

Given the strict limitation in time, the special measure appears to be proportionate to 
the aim pursued. 

Under Article 395 of the VAT Directive, 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 negative implications for the Community budget. 

5. 

ADDITIONAL INFORMATION 

The proposal amends the sunset clause included in Council Decision 2007/250/EC. 

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Proposal for a 

COUNCIL DECISION 

amending Council Decision 2007/250/EC authorising the United Kingdom to introduce a 
special measure derogating from Article 193 of Directive 2006/112/EC on the common 
system of value added tax 

(only the English version is authentic) 

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 tax6, and in particular Article 395(1) thereof, 

Having regard to the proposal from the Commission7, 

Whereas: 

(1) 

(2) 

(3) 

In  a letter  registered  by  the  Secretariat-General of the Commission  on 28 July 2008, 
the  United  Kingdom  requested  authorisation  to  continue  to  apply  a  special  measure 
derogating from Article 193 of Council Directive 2006/112/EC as regards the person 
liable  for  the  payment  of  the  value  added  tax  (VAT)  to  the  tax  authorities  and 
previously provided for by Council Decision 2007/250/EC of 16 April 20078. 

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed the other Member States by letter of 17 March 2009 of the request made by 
the  United  Kingdom.  By  letter  dated  20  March  2009,  the  Commission  notified  the 
United Kingdom it had all the information it considered necessary for appraisal of the 
request. 

The  person  liable  for  the  payment  of  the  value  added  tax  under  Article  193  of 
Directive  2006/112/EC  is  the  taxable  person  supplying  the  goods.  However,  the 
current  derogating  measure  enabled  the  United  Kingdom  to  apply,  under  certain 
conditions,  a  reverse  charge  mechanism  which  implied  that  the  liability  for  the 
payment  of  the  VAT  was  shifted  to  the  taxable  person  to  whom  the  supplies  were 
made  as  regards  certain  supplies  of  mobile  phones  and  integrated  circuit  devices, 
provided the taxable amount of the supply was equal or higher than GBP 5 000. 

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OJ L 347, 11.12.2006, p. 1  
OJ C , , p. . 
OJ L 109, 26.4.2007, p. 42 

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(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

The purpose of that derogating measure was to deal with certain aggressive forms of 
tax  evasion,  and  in  particular  with  'carousel'  schemes  whereby  goods  were  supplied 
several times without VAT being paid to the tax authorities but leaving the customers 
in receipt of a valid invoice for VAT deduction. The application of the reverse charge, 
without actual payment of VAT from the customer to the supplier, would remove the 
possibility of that form of tax evasion. 

As,  at  the  time  the  derogation  was  proposed,  it  could  not  be  ascertained  that  the 
objectives would be achieved and that there would be no negative impact, only a short 
period  was  allowed  for  the  derogation  to  apply.  In  this  context,  it  has  not  yet  been 
established  by  the  United  Kingdom  whether  the  current  arrangement  has  effectively 
enabled  the  prevention  of  these  forms  of  tax  evasion.  The  United  Kingdom  has 
furthermore  problems  with  the  obligation  to  evaluate  the  overall  operation  of  the 
measure, in particular the possible shifting of tax evasion to other products or to the 
retail level and its impact on the functioning of the internal market. 

The  Commission  understands  that  the  United  Kingdom  is  not  yet  in  a  position  to 
provide the necessary information and that some more time is needed to justify their 
request for an extension of the initial derogation over a longer period. 

In  its  original  proposal  for  Council  Decision  2007/250/EC9,  the  Commission  had 
proposed an expiry date of 31 December 2009, which has been altered by the Council 
to  30  April  2009,  and  therefore  would  find  it  acceptable  that  the  measure  would  be 
extended until that date. However, the ECOFIN Council of 10 March 2009 agreed that 
the derogation of the United Kingdom should be extended for two years. 

Given  the  apparent  seriousness  of  VAT  fraud in the  United Kingdom,  as attested by 
the  information  submitted  by  the  United  Kingdom  with  their  initial  application,  the 
measure  remains  proportionate  as  the  extension  in  time  is  limited  to  a  reasonable 
period  and  without  forming  either  the  basis  of  an  overall  measure  for  a  generalised 
reverse charge system or the start of a more permanent application of this derogation. 

Following the Commission's Communication on possible measures to change the VAT 
system  to  fight  fraud10  and  given  that  such  measures,  in  practice,  could  include  a 
similar  measure  in  the  form  of  a  Commission  proposal  to  change  Directive 
2006/112/EC to introduce a pilot project available to all Member States, this Decision 
should  expire  if  this  measure  comes  into  force  before  the  foreseen  end  date  of  this 
derogation. 

(10)  The  derogation  has  no  negative  impact  on  the  Community's  own  resources  accruing 

from VAT, 

HAS ADOPTED THIS DECISION:  

Article 4 of Council Decision 2007/250/EC is replaced by the following: 

Article 1 

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COM(2006) 555 final, 28.9.2006 
COM(2008) 109final, 22.2.2008 

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This  Decision  shall  expire  on  30  April  2011  or  on  the  date  an  amendment  to  Directive 
2006/112/EC, allowing for such measure in the form of a pilot project, enters into force. 

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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