Proposal for a COUNCIL IMPLEMENTING DECISION amending Decision 2007/884/EC 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
Date: 2016-10-07
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: United Kingdom, VAT, derogation from EU law, hire purchase, motor vehicle, tax relief, vehicle rental

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 7.10.2016  COM(2016) 645 final 2016/0315 (NLE)   Proposal for a COUNCIL IMPLEMENTING DECISION amending Decision 2007/884/EC 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  
 
EXPLANATORY MEMORANDUM 

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 derogating 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 14 March 2016, 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  2013/681/EU1.  In  accordance  with  Article  395(2)  of 
Directive  2006/112/EC,  the  Commission  informed  the  other  Member  States  by  letter  dated 
28 June 2016 of the request made by the United Kingdom. By letter dated 28 June 2016, the 
Commission notified the United Kingdom that it had all the information necessary to consider 
the request. 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

Article 168 and 168a of the VAT Directive provides that a taxable person is entitled to deduct 
the VAT charged on purchases made for the purposes of his taxed transactions. At the same 
time, Article 26(1)(a) of the VAT Directive stipulates that the use of goods, forming part of 
the assets  of a business, for private purposes  is to  be considered as  a supply  of services  for 
consideration  if  the  VAT  on  these  goods  was  wholly  or  partly  deductible.  As  a  result,  the 
system  ensures  that  final  consumption  is  taxed  when  the  corresponding  input  VAT  was 
initially deducted. 

In relation to motor vehicles, it is sometimes difficult and burdensome for the taxable persons 
to  identify  and  register  the  split  between  business  and  private  use  and  for  the  tax 
administration  to  verify  the  effective  division  of  use.  This  would  be  the  case  even  if  the 
United Kingdom made use of the option provided for in Article 168a(2) of the VAT Directive 
to limit the deduction on expenditure related to company cars to the proportion of the taxable 
person's effective business use. In addition, because of the number of mixed use vehicles, tax 
evasion could become considerable. 

In order to simplify VAT collection and to combat tax evasion, the United Kingdom has been 
authorised since 19952 and for the last time in 20133, to restrict, until 31 December 2016, to 
50% the right of the hirer or lessee to deduct input tax on charges for hire or lease of a car 
where the car is not used entirely for business purposes. In order to avoid double taxation the 

1 

2 

3 

Council Implementing Decision 2013/681/EU of 15 November 2013 amending Decision 2007/884/EC 
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 (OJ L 316, 27.11.2013, p. 
41). 
Council  Decision  95/252/EC  of  29  June  1995  authorizing  the  United  Kingdom  to  apply  a  measure 
derogating from Articles 6 and 17 of the Sixth Council Directive (77/388/EEC) on the harmonization of 
the laws of the Member States relating to turnover taxes (OJ L 159, 11.7.1995, p. 19) 
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  tax  (OJ  L  346,  29.12.2007,  p.  21)  was  extended  by  Council 
Implementing Decision 2011/37/EU of 18 January 2011 (OJ L 19, 22.1.2011, p. 11) up to 31 December 
2013 and by Council implementing Decision 2013/681/EU of 15 November 2013 up to 31 December 
2016 (OJ L 316, 27.11.2013, p. 41). 

EN 

2 

   EN 

                                                 
United Kingdom is also authorised not to treat the private use of a business car hired or leased 
by a taxable person as a supply 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  option 
provided for in Article 168a(2) of the VAT Directive does not foresee partial deduction at a 
flat  rate  and  could  be  applicable  only  for  input  VAT  on  cars  forming  part  of  the  business 
assets of the taxable person; therefore, a derogation is an appropriate measure to achieve the 
requested simplification.  
In  accordance  with  Article  3  of  Council  Decision  2007/884/EC4,  as  amended,  the  United 
Kingdom  has  presented  a  report  covering  the  application  of  the  Decision  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. The report sets out that pending the dataset used 
the actual estimated ratio between professional and private use does not deviate significantly 
from 50%. 

Derogations  are  normally  granted  for  a  limited  time  as  to  allow  an  assessment  whether  the 
special  measure  is  appropriate  and  effective.  The  report  provided  by  the  United  Kingdom 
suggests  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 2019 and to request the United Kingdom to present a new report if 
a new extension request would be envisaged beyond that end date.  

 • 

Consistency with existing policy provisions in the policy area 

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. 

Notwithstanding previous initiatives to establish rules on which categories of expenditure may 
be  subject  to  a  restriction  on  the  right  to  deduct5,  such  derogation  is  appropriate  in  the 
awaiting of a harmonisation of these rules at EU level.  

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 
subsidiarity principle does not apply. 

4 
5 

OJ L 346, 29.12.2007, p. 21–22.  
COM (2004) 728 final - Proposal for a Council Directive amending Directive 77/388/EEC with a view 
to simplifying value added tax obligations (OJ C 24, 29.1.2005, p.10) withdrawn on 21 May 2014 (OJ 
C 153 21. 05. 2014, p. 3). 

EN 

3 

   EN 

                                                 
• 

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. In particular, given the potential for businesses to under declare their liability and the 
burdensome  check  of  mileage  data  for  tax  authorities,  the  50%  restriction  would  avoid  an 
overstatement of business mileage and contributes to protecting against revenue loss through 
error and evasion and to simplifying the VAT collection in a specific sector. 

• 

Choice of the instrument 

Proposed instrument is a Council Implementing Decision. Other means would not be adequate 
for the following reason as under Article 395 of Council Directive 2006/112/EC, derogation 
from  the  common  VAT  rules  is  only  possible  upon  authorisation  of  the  Council  acting 
unanimously  on  a  proposal  from  the  Commission.  A  Council  Implementing  Decision  is  the 
most suitable instrument since it can be addressed to an individual Member State. 

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. 

• 

Impact assessment 

The Decision aims at extending in time a simplification measure which is designed to counter 
VAT evasion and to simplify the procedure for charging tax. The 50% input tax restriction is 
a proxy for the actual amount of tax due on the use of relevant cars for private motoring. It 
removes  the  need  for  the  hirer/lessee  to  keep  records  of  the  private  mileage  travelled  in 
business  cars  and  to  account  for  tax  on  the  actual  private  use  of  each  car  and  therefore 
significantly reduces administrative burden for taxpayers and tax authorities. Businesses using 
their car for professional  purpose more than 50%  but less than 100% would bear additional 
costs. 

Moreover, because of the narrow scope 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 2019. 

EN 

4 

   EN 

In  case  the  United  Kingdom  would  consider  another  extension  of  the  derogating  measure 
beyond 2019, a new evaluation report should be submitted to the Commission together with 
the extension request no later than 1 April 2019. 

EN 

5 

   EN 

2016/0315 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Decision 2007/884/EC 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 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 tax6, and in particular Article 395 thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

6 
7 

8 

Council  Decision  2007/884/EC7,  lastly  amended  by  Council  Implementing  Decision 
2013/681/EU8, authorised the United Kingdom to restrict to 50% the right of the hirer 
or lessee to deduct input value added tax (VAT) on charges for the hire or lease of a 
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. That 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. 

In  a  letter  registered  by  the  Commission on  14 March 2016,  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 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 28 June 2016. By letter dated 28 June 2016, the Commission 
notified the United Kingdom that it had all the information necessary to consider the 
request. 

According to the report provided by the United Kingdom, the restriction to 50% still 
corresponds to the actual circumstances as regards the business and the non-business 
use by the hirer or lessee of the vehicles concerned. It is therefore appropriate that the 
United Kingdom is authorised to apply the measure until 31 December 2019. 

OJ L 347, 11.12.2006, p. 1. 
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 tax (OJ L 346, 29.12.2007, p. 21). 
Council Implementing Decision 2013/681/EU of 15 November 2013 amending Decision 2007/884/EC 
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 (OJ L 316, 27.11.2013, p. 
41). 

EN 

6 

   EN 

                                                 
(5) 

In  accordance  with  Article  3  of  Council  Decision  2007/884/EC,  as  amended,  the 
United Kingdom submitted a report to the Commission covering the application of the 
Decision  which  included  a  review  of  the  percentage  restriction.  The  information 
provided by the United Kingdom still shows that a restriction of the right of deduction 
to 50% corresponds to the actual circumstances as regards the ratio of business to non-
business  use  of  the  vehicles  concerned.  The  United  Kingdom  should  therefore  be 
authorised to apply the measure for a further limited period, until 31 December 2019. 

(6)  Where the United Kingdom considers that a further extension beyond 2019 would be 
necessary, it should submit a report which includes a review of the percentage applied 
together with an extension request to the Commission no later than 1 April 2019. 

(7) 

The derogation will have only a negligible effect on the overall amount of tax revenue 
collected at the stage of final consumption and will have no adverse impact on the EU 
own resources accruing from VAT. 

(8) 

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

HAS ADOPTED THIS DECISION:  

Article 3 of Decision 2007/884/EC is replaced by the following: 

Article 1 

This Decision shall expire on 31 December 2019. 

'Article 3 

Any request for extension of the measures provided for in this Decision shall be accompanied 
by  a  report,  submitted  to  the  Commission  by  1 April 2019,  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 from 1 January 2017. 

Article 2 

Article 3 

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

Done at Brussels, 

For the Council 
The President 

EN 

7 

   EN