Proposal for a COUNCIL IMPLEMENTING DECISION Amending Decision 2007/884/EC authorising the United Kingdom 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
Date: 2010-12-02
Institutions: European Commission
Subjects: United Kingdom, VAT, basis of tax assessment, distributive trades, provision of services, tax exemption, tax harmonisation, tax relief

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EUROPEAN COMMISSION 

Brussels, 2.12.2010 
COM(2010) 707 final 

2010/0344 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

Amending Decision 2007/884/EC authorising the United Kingdom 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 

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

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 (hereafter ‘the 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 VAT or to prevent certain forms of tax evasion or avoidance. 

By  letter  registered  with  the  Secretariat-General  of  the  Commission  on  22  July  2010,  the 
United  Kingdom  requested  authorisation  to  continue  to  apply  a  derogation  measure 
concerning the right of deduction of VAT borne on the hire or lease of motor cars also used 
for  private  purposes  and  granted,  for  the  last  time,  by  Council  Decision  2007/884/EC1.  In 
accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission  informed  the 
other  Member  States  by  letter  dated  12  October  2010  of  the  request  made  by  the  United 
Kingdom. By letter dated 15 October 2010, the Commission notified the United Kingdom that 
it had all the information necessary to consider the request. 

General context 

The above-mentioned Council Decision authorised the United Kingdom to apply a restriction 
of the right of deduction to 50% of the input VAT incurred on the hire or lease of cars used by 
taxable persons for both business and private use. At the same time, the private use by taxable 
persons  of  such  leased  or  hired  cars  was  not  to  be  considered  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 and is due 
to expire on 31 December 2010.  

Derogations  are  normally  granted  for  a  limited  time  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  made  available  by  the  United  Kingdom,  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. 
An extension of the derogating measure is therefore appropriate. 

However, any extension should be limited in time in order to assess whether the conditions, 
on which the derogation is based, would still be valid. Therefore, it is proposed to extend the 
derogation until the end of 2013 and to request the United Kingdom to present a report by 1 
April 2013 including a review of the percentage restriction applied in case a further extension 
would  be  envisaged  beyond  2013.  The  Decision  would  in  any  case  expire  in  case  EU  rules 
governing restrictions on the right of deduction would come into force before that end date. 

Existing provisions in the area of the proposal 

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OJ L 346, 29.12.2007, p. 21. 

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Article 176 of the VAT Directive stipulates that the Council shall determine the expenditure 
of  which  the  VAT  is  not  deductible.  Until  such  time,  Member  States  are  authorised  to 
maintain exclusions which were in place on 1 January 1979. Therefore, there are a number of 
"standstill" provisions restricting the right of deduction in relation to motor vehicles.  

In  2004,  the  Commission  made  a  proposal2  which  contains  rules  on  which  categories  of 
expenditure may be subject to a restriction on the right to deduct but the Council has not been 
able yet to reach an agreement on that proposal. 

2. 

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND 
IMPACT ASSESSMENTS 

The  implementing  Decision  aims  at  extending  in  time  a  simplification  measure  which 
removes the need for the taxable person to keep records 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 and the limited application in time, 
the impact will in any case be limited.  

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

The implementing Decision is based on Article 395 of the VAT Directive 2006/112/EC of 28 
November 2006 on the common system of value added tax. 

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

The  implementing  Decision  concerns  an  authorisation  granted  to  a  Member  State  upon  its 
own request and does not constitute any obligation. The proposal therefore complies with the 
proportionality principle. 

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

4. 

BUDGETARY IMPLICATION 

The proposal has no implication for the Union budget. 

5. 

OPTIONAL ELEMENTS 

The proposal includes a sunset clause. 

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COM(2004) 728final (OJ C 24, 29.1.2005, p. 10) 

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2010/0344 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

Amending Decision 2007/884/EC authorising the United Kingdom 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 on the Functioning of the European Union, 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax3, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

In  a  letter  registered  by  the  Commission's  Secretariat-General  on  22  July  2010,  the 
United  Kingdom  requested  authorisation  to  extend  a  derogating  measure  in  order  to 
continue to restrict the right of deduction of VAT by the hirer or lessee on charges for 
the  hire  or  lease  of  a  passenger  car  where  the  car  is  not  used  entirely  for  business 
purposes.  

The Commission informed the other Member States of the request made by the United 
Kingdom  by  letter  dated  12  October  2010.  By  letter  dated  15  October  2010,  the 
Commission notified the United Kingdom that it had all the information necessary to 
consider the request. 

Council Decision 2007/884/EC of 20 December 2007 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  tax4,  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 was 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. 

(4) 

According to the information provided by the United Kingdom, the restriction to 50% 
still  corresponds  to  the  actual  circumstances  as  regards  the  business  and  the  non-

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4 

OJ L 347, 11.12.2006, p. 1. 
OJ L 346, 29.12.2007, p. 21. 

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business use by the hirer or lessee of the vehicles concerned. It is therefore appropriate 
that  the  United  Kingdom  would  be  authorised  to  apply  the  measure  during  a  further 
limited period, until 31 December 2013. 

(5)  Where the United Kingdom considers a further extension beyond 2013, a report which 
includes  a  review  of  the  percentage  applied  should  be  submitted  to  the  Commission 
together with that extension request no later than 1 April 2013. 

(6) 

On  29  October  2004,  the  Commission  adopted  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  of 
deduction  may  apply.  Under  this  proposal,  exclusions  on  the  right  to  deduct  may  be 
applied  to  motorised  road  vehicles.  The  derogating  measures  provided  for  in  the 
Decision should expire on the date of the entry into force of such amending Directive, 
if that date is earlier than the date of expiry provided for in this Decision. 

(7) 

The  derogation  has  no  impact  on  the  Union's  own  resources  accruing  from  value 
added tax. 

(8) 

Decision 2007/884/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Article 1 

Decision 2007/884/EC is amended as follows: 

(1) 

Article 3 is replaced by the following  

"Article 3 

This  Decision  shall  expire  on  the  date  of  entry  into  force  of  Union  rules  determining  the 
expenditure relating to motorised road vehicles that is not eligible for full deduction of VAT, 
but on 31 December 2013 at the latest. 

Any request for extension of those measures shall be accompanied by a report, submitted to 
the  Commission  no  later  than  1  April  2013,  which  includes  a  review  of  the  percentage 
restriction applied on the right to deduct VAT on the hire or lease of cars not entirely used for 
business purposes." 

This Decision shall apply as from 1 January 2011. 

Article 2 

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Article 3 

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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