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: 2019-11-11
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

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   EUROPEAN COMMISSION  Brussels, 11.11.2019  COM(2019) 547 final 2019/0239 (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  (‘the  VAT  Directive’1),  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 2 April 2019, the United Kingdom requested the 
authorisation to continue to apply a measure derogating from the overall principles governing 
the  right  of  deduction  of  input  VAT  in  relation  to  cars  hired  or  leased  where  the  car  is  not 
used  entirely  for  business  purposes.  Together  with  the  request  for  extension,  the  United 
Kingdom  submitted  a  report  including  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.  

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other 
Member States by letters dated 29 April 2019 of the request made by the United Kingdom. By 
letter  dated  2 May 2019,  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 

Articles 168 and 169 of the VAT Directive provide 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  would make 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  20163  to  restrict,  until  31 December 2019, to 
50% the right of the hirer or lessee to deduct input tax on charges for hire or lease of a car 

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OJ L 347, 11.12.2006, p. 1. 
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, by Council Implementing Decision 2013/681/EU of 15 November 2013 up to 31 December 2016 
(OJ L 316, 27.11.2013, p. 41) and by Council Implementing Decision (EU) 2016/2265 of 6 December 
2016 (OJ L 342, 16.12.2016, p. 28) up to 31 December 2019. 

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where the car is not used entirely for business purposes. In order to avoid double taxation the 
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(2) 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. 

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. 

The  United  Kingdom  has  requested  to  be  authorised  to  continue  the  application  of  the 
derogation until the end of the implementation period foreseen in the withdrawal agreement. 
In  this  regard,  on  29 March 2017  the  United  Kingdom  submitted  the  notification  of  its 
intention to  withdraw  from  the Union pursuant  to Article 50 of the Treaty  on the  European 
Union (TEU). In accordance with Article 50(3) TEU, the Treaties are to cease to apply to the 
withdrawing State from the date of entry into force of a withdrawal agreement or, failing that, 
two years after the notification, unless the European Council, in agreement with the Member 
State  concerned,  unanimously  decides  to  extend  this  period.  The  period  has  been  extended 
three times, last time by European Council Decision (EU) 2019/18105, which extended it until 
31 January 2020. 

On 11 January 2019, by Decision (EU) 2019/2746, the Council authorised the signature of the 
withdrawal  agreement  agreed  at  negotiators’  level  on  14 November 2018.  The  Union 
confirmed that it stands ready to proceed swiftly with its signature and conclusion in the event 
that  the  United  Kingdom  Parliament  approves  the  withdrawal  agreement.  Part  Four  of  the 
withdrawal agreement7 provides for a transition period starting on the date of entry into force 
of  the  agreement,  during  which  Union  law  is  to  continue  to  apply  to  and  in  the  United 
Kingdom as laid down therein. 

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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). 
European  Council  Decision  (EU)  2019/1810  taken  in  agreement  with  the  United  Kingdom  of  29 
October  2019  extending  the  period  under  Article  50  (3)  of  the  Treaty  on  the  European  Union  (OJ  L 
278I, 30.10.2019, p. 1). 
Council Decision (EU) 2019/274 of 11 January 2019 on the signing, on behalf of the European Union 
and  of  the  European  Atomic  Energy  Community,  of  the  Agreement  on  the  withdrawal  of  the  United 
Kingdom  of  Great  Britain  and  Northern  Ireland  from  the  European  Union  and  the  European  Atomic 
Energy Community (OJ L 47 I, 19.2.2019, p.1). 
Agreement on the  withdrawal of the United Kingdom of Great Britain and Northern Ireland from the 
European Union and the European Atomic Energy Community (OJ C 144 I, 25.4.2019, p. 1). 

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In  any  event,  this  Decision  applies  only  as  long  as  Union  law  applies  to  and  in  the  United 
Kingdom. 

Therefore,  given  the  uncertainty  related  to  the  date  of  entry  into  force  of  the  withdrawal 
agreement,  it  is  considered  that  the  most  appropriate  way  forward  is  to  include  a  sunset 
clause, set at 31 December 2022. The United Kingdom is requested to present a new report no 
later 
if  a  new  extension  request  would  be  envisaged  beyond 
31 December 2022. 

than  1 April 2022, 

Nevertheless, in case of withdrawal of the United Kingdom from the European Union without 
agreement  or  in  case  of  the  ratification  of  the  withdrawal  agreement,  the  derogation  should 
cease  to  apply  on  whichever  date  happens  first:  either  31 December 2022,  or  the  date  of 
withdrawal  from  the  Union  without  an  agreement,  or  the  date  of  the  end  of  the  transition 
period  foreseen  in  the  withdrawal  agreement  in  case  of  the  ratification  of  the  withdrawal 
agreement. 

• 

Consistency with existing policy provisions in the policy area 

Similar derogations in relation to the right of deduction have been granted to other Member 
States.  

Article 176 of the VAT Directive 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 VAT in relation to passenger cars.  

Notwithstanding previous initiatives to establish rules on which categories of expenditure may 
be  subject  to  a  restriction  on  the  right  to  deduct8,  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. 

• 

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  prevent  certain  forms  of  tax  evasion  or  avoidance  and  to  simplify  the  VAT 
collection in a specific sector. 

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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). 

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• 

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 

No stakeholder consultation has been conducted. 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.  

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 2022.  If the United Kingdom  withdraws from  the European Union before that 
date  without  an  agreement,  this  Decision  will  cease  to  apply  automatically  on  the  date  of 
withdrawal,  as  an  effect  of  the  application  of  Article  50  TEU.  If  the  withdrawal  agreement 
enters  into  force,  the  Decision  will  cease  to  apply  on  the  date  of  the  end  of  the  transition 
period foreseen in that agreement, in case it is set at a date prior to 31 December 2022. 

In  case  the  United  Kingdom  would  consider  another  extension  of  the  derogating  measure 
beyond 2022, a new evaluation report should be submitted to the Commission together with 
the extension request no later than 1 April 2022. 

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2019/0239 (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 tax1, and in particular the first subparagraph of Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Articles 168 and 169 of Directive 2006/112/EC establish a right for taxable persons to 
deduct value added tax (VAT) charged on supplies to them of goods and services that 
are  used  for  the  purposes  of  their  taxed  transactions  or  for  certain  other  purposes. 
Article 26(1)(a) of that Directive treats the use of business assets for the private use of 
taxable persons or their staff or, more generally, for purposes other than those of their 
business as a supply of services for consideration. 
Council Decision 2007/884/EC2 authorises the United Kingdom to restrict to 50% the 
right  of  the  hirer  or  lessee  of  a  car  to  deduct  VAT  under  Article  168  or  169  of 
Directive  2006/112/EC  on  the  cost  of  hiring  or  leasing  of  a  car  where  the  car  is  not 
used entirely for business purposes. It also authorises the United Kingdom not to treat 
as  supplies  of  services  for  consideration  the  private  use  of  a  business  car  hired  or 
leased  by  a  taxable  person.  Those  simplification  measures  remove  the  need  for  the 
hirer or lessee of a business car to keep records of private mileage travelled in that car 
or  to  account  for  VAT  on  the  actual  private  mileage  travelled  in  that  car.  Decision 
2007/884/EC is due to expire on 31 December 2019. 

By  letter  registered  with  the  Commission  on  2 April 2019,  the  United  Kingdom 
requested  authorisation  to  continue  to  apply  the  derogating  measures  authorised  by 
Decision 2007/884/EC (“the derogating measures”).  

By  letter  dated  29 April 2019,  the  Commission  informed  the  other  Member  States 
pursuant to Article 395(2) of Directive 2006/112/EC of the request that had been made 
by  the  United  Kingdom.  By  letter  dated  2 May 2019,  the  Commission  notified  the 
United Kingdom that it had all the information necessary to consider the request. 

(5) 

On 29 March 2017, the United Kingdom submitted the notification of its intention to 
withdraw from the Union pursuant to Article 50 of the Treaty on the European Union 

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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). 

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(6) 

(7) 

(8) 

(TEU). In accordance with Article 50(3) TEU, the Treaties are to cease to apply to the 
withdrawing  State  from  the  date  of  entry  into  force  of  a  withdrawal  agreement  or, 
failing that, two years after the notification, unless the European Council, in agreement 
with  the  Member  State  concerned,  unanimously  decides  to  extend  this  period.  The 
period  has  been  extended  three  times,  last  time  by  European  Council  Decision  (EU) 
2019/18103, which extended it until 31 January 2020. 
On  11 January 2019,  by  Decision  (EU)  2019/2744,  the  Council  authorised  the 
signature  of  the  withdrawal  agreement  agreed  at  negotiators’  level  on  14  November 
2018. The Union confirmed that it stands ready to  proceed swiftly with its  signature 
and  conclusion  in  the  event  that  the  United  Kingdom  Parliament  approves  the 
withdrawal  agreement.  Part  Four  of  the  withdrawal  agreement5  provides  for  a 
transition period starting on the date of entry into force of the agreement, during which 
Union law is to continue to apply to and in the United Kingdom as laid down therein. 

In  any  event,  this  Decision  applies  only  as  long  as  Union  law  applies  to  and  in  the 
United Kingdom. 

Alongside  its  request,  the  United  Kingdom  submitted  a  report  to  the  Commission  in 
accordance  with  Article  3(2)  of  Decision  2007/884/EC  including  a  review  of  the 
percentage restriction  applied on the right  to  deduct  VAT. The information provided 
by the United Kingdom shows that a percentage restriction of 50% still remains a fair 
reflection  of  actual  circumstances  on  the  ground  as  regards  the  ratio  of  business  to 
non-business use of the vehicles affected by the derogating measures. Extension of the 
derogating  measures  should,  however,  be  limited  to  the  time  needed  to  evaluate  the 
effectiveness  of  the  derogating  measures  and  the  appropriateness  of  the  percentage. 
The  United  Kingdom  should  therefore  be  authorised  to  continue  to  apply  the 
derogating measures for a further limited period to 31 December 2022. 

(9) 

A deadline should be set for requesting authorisation for any further extension of the 
derogating  measures  beyond  2022.  The  United  Kingdom  should  also  be  required  to 
submit  a  report  alongside  any  such  extension  request,  including  a  review  of  the 
percentage restriction applied on the right to deduct VAT. 

(10)  The  derogating  measures  will  have  no  adverse  impact  on  the  Union's  own  resources 

accruing from VAT, 

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 2022. 

'Article 3 

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European  Council  Decision  (EU)  2019/1810  taken  in  agreement  with  the  United  Kingdom  of  29 
October 2019 extending the period under Article 50(3) TEU (OJ L 278I, 30.10.2019, p.1). 
Council Decision (EU) 2019/274 of 11 January 2019 on the signing, on behalf of the European Union 
and  of  the  European  Atomic  Energy  Community,  of  the  Agreement  on  the  withdrawal  of  the  United 
Kingdom  of  Great  Britain  and  Northern  Ireland  from  the  European  Union  and  the  European  Atomic 
Energy Community (OJ L 47 I, 19.2.2019, p. 1). 
Agreement on the  withdrawal of the United Kingdom of Great Britain and Northern Ireland from the 
European Union and the European Atomic Energy Community (OJ C 144 I, 25.4.2019, p. 1). 

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Any request for authorisation to extend the derogating measures authorised by this Decision 
shall be submitted to the Commission by 1 April 2022. The request shall be accompanied by a 
report  which  includes  a  review  of  the  percentage  restriction  applied  on  the  right  to  deduct 
VAT on the cost of hiring or leasing cars not used entirely for business purposes.’. 

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

Done at Brussels, 

Article 2 

For the Council 
The President 

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