Proposal for a COUNCIL IMPLEMENTING DECISION authorising the United Kingdom to apply a special measure derogating from Articles 26(1)(a), 168 and 168a of Directive 2006/112/EC on the common system of value added tax
Date: 2015-10-12
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: United Kingdom, VAT rate, derogation from EU law, motor fuel, motor vehicle, oxide, tax collection, tax harmonisation

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   EUROPEAN COMMISSION  Brussels, 12.10.2015  COM(2015) 494 final 2015/0238 (NLE)   Proposal for a COUNCIL IMPLEMENTING DECISION authorising the United Kingdom to apply a special measure derogating from Articles 26(1)(a), 168 and 168a of Directive 2006/112/EC on the common system of value added tax  
 
EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

Reasons 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  Commission  on  22  May  2015,  the  United  Kingdom  requested 
authorisation to continue to apply a measure derogating from Articles 16 and 168 of the VAT 
Directive. In accordance with Article 395(2) of the VAT Directive, the Commission informed 
the  other  Member  States  by  letter  dated  5  June  2015  of  the  request  made  by  the  United 
Kingdom. By letter dated 8 June 2015, the Commission notified United Kingdom that it had 
all the information it considered necessary for appraisal of the request. 

General context 

Articles 168 and 168a of the VAT Directive provide that a taxable person is entitled to deduct 
VAT charged on purchases made for the purpose of taxed transactions. Article 26(1)(a) of the 
same Directive requires the use of goods forming part of the assets of a business for private 
purposes to be a supply of services for consideration if the VAT on the goods was eligible for 
deduction.  This  system  allows  for  the  recovery  of  initially  deducted  VAT  in  relation  to  the 
private use. 

In  the  case  of  company  cars,  partly  used  for  private  (non-business)  purposes,  it  is  often  a 
difficult matter to calculate and to tax the private use under the above-mentioned rules. 

In  this  context,  the  United  Kingdom  has  operated  a  special  scheme  of  flat  rate  taxation  of 
private  use  authorised  by  Council  Decision  86/356/EEC  of  21  July  1986  authorising  the 
United  Kingdom  to  apply  flat-rate  measures  in  respect  of  non-deductible  value  added  tax 
charged on fuel expenditure in company cars1, which was based on the engine capacity and 
fuel type of the car. 

This original derogation was abolished and replaced by Council Decision 2006/659/EC of 25 
September  2006  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 taxes2, introducing a flat rate taxation of the private 
use on the basis of the car’s CO2 emission rating. This scheme is based on the fact that there is 
a  direct  relationship  between  the  emission  and  the  amount  of  fuel  consumed  as  higher 
emissions correspond with greater fuel consumption. Based on these emission ratings, the fuel 
consumption  per  kilometre  is  calculated,  which  is  then  combined  with  the  average  private 
mileage determined on the basis of direct tax data and the retail price of road fuel. This results 
in a private use charge which corresponds with the amount of VAT on the private use of the 
vehicle. This charge is revalorised once a year as to take changes in fuel prices into account. 

According  to  the  United  Kingdom,  this  system  has  proven  to  be  accurate  and  has  led  to  a 
substantial  simplification,  both  for  businesses  and  the  tax  administration.  In  this  context,  it 
should be pointed out that the system is optional for taxable persons who could decide to stay 

1 
2 

OJ L 212, 2.8.1986, p. 35. 
OJ L 272, 3.10.2006, p. 15. 

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under the normal rules. However, it is estimated that around 230.000 vehicles operate within 
the simplification. 

On this basis, the United Kingdom has requested to extend the application of the derogation. 

The above-mentioned Decision, which ends on 31 December 2015, was granted on the basis 
of the so-called 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  assessment3  which,  without  substantial  changes  as  regards  its  content, 
was replaced by the VAT Directive which therefore forms the basis for the current Decision. 

Any extension request beyond 31 December 2018 should be accompanied by a report on the 
functioning of the system. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 395 of the VAT Directive. 

• 

Subsidiarity (for non-exclusive competence) 

Considering the provision of the VAT Directive on which the proposal is based, the proposal 
falls under the exclusive competence of the Union. The subsidiarity principle therefore does 
not apply. 

• 

Proportionality 

The Decision concerns an authorisation granted to a Member state upon 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,  i.e.  to  simplify  the  procedure  for  collecting  VAT.  It  does  not  go  beyond  what  is 
required to simplify VAT collection in a specific sector. 

The system remains optional for taxable persons. 

• 

Choice of the instrument 

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.  Moreover,  a  Council  Decision  is  the  most  suitable  instrument  since  it  can  be 
addressed to individual Member States. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

This  proposal  is  based  on  a  request  made  by  the  United  Kingdom  and  concerns  only  this 
Member State. 

• 

Collection and use of expertise 

There was no need for external expertise. 

3 

OJ L 145, 13.6.1977, p. 1. 

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• 

Impact assessment 

The Decision proposal aims at simplifying VAT collection in relation to company cars partly 
used for non-business purposes and has therefore a potential positive impact. 

For  taxable  persons,  who  would  opt  to  make  use  of  this  system,  it  reduces  administrative 
burdens and compliance costs by removing the need to keep detailed mileage records for each 
company  car  for  VAT  purposes.  Such  record  keeping  requirements  are  likely  to  be  time 
consuming and often impose significant administrative burdens for relatively small amounts 
of  tax.  The  simplification  method  also  reduces  burdens  for  the  tax  authorities  which  would 
otherwise be required to audit numerous individual situations. 

However, because of the narrow scope of the derogation and the limited application in time, 
the impact will in any case be limited.  

4. 

BUDGETARY IMPLICATIONS 

The proposal will have no negative implication for the EU budget. 

5. 

OTHER ELEMENTS 

The proposal includes a sunset clause; an automatic time limit which is set at 31 December 
2018. 

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2015/0238 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising the United Kingdom to apply a special measure derogating from Articles 
26(1)(a), 168 and 168a 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 tax4, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Council  Decision  2006/659/EC5  authorised  the  United  Kingdom  to  apply  special 
simplification  measures  in  order  to  determine  on  a  flat-rate  basis  the  proportion  of 
non-deductible value added tax (VAT) relating to expenditure on fuel in business cars 
not exclusively used for business purposes. The system, which is optional for taxable 
persons, is based 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. 

By  letter  registered  with  the  Commission  on  22  May  2015,  the  United  Kingdom 
requested authorisation to continue to apply the measure. 

The Commission informed the other Member States of the request made by the United 
Kingdom in a letter dated 5 June 2015. By letter dated 8 June 2015, the Commission 
notified the United Kingdom that it had all the information necessary to consider the 
request. 

According  to  the  United  Kingdom,  the  arrangement  has  effectively  led  to  a 
simplification, both for taxable persons and the tax administration, of the procedure of 
collecting  VAT  in  relation  to  expenditure  on  fuel  for  business  cars.  It  is  therefore 
appropriate  that  the  United  Kingdom  be  authorised  to  apply  the  measure  until  31 
December 2018. 

(5)  Where  the  United  Kingdom  considers  that  a  further  extension  beyond  2018  is 
necessary,  it  should  submit  a  report  together  with  an  extension  request  to  the 
Commission no later than 31 March 2018. 

(6) 

The  derogating  measure  will  have  no  adverse  impact  on  the  Union's  own  resources 
accruing from VAT, 

4 
5 

OJ L 347, 11.12.2006, p. 1. 
Council Decision 2006/659/EC of 25 September 2006 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 (OJ L 272, 3.10.2006, p. 15). 

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HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Articles  26(1)(a),  168  and  168a  of  Directive  2006/112/EC,  the 
United Kingdom is authorised, from 1 January 2016 until 31 December 2018, 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 

Any  request  for  extension  of  the  special  measure  provided  for  in  this  Decision  shall  be 
submitted  to  the  Commission  no  later  than  31  March  2018  and  shall  be  accompanied  by  a 
report which includes a review of the application of this measure. 

Article 4 

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

Done at Brussels, 

Article 5 

For the Council 
The President 

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