Proposal for a COUNCIL IMPLEMENTING DECISION authorising the United Kingdom in respect of Northern Ireland to apply a special measure derogating from Articles 16 and 168 of Directive 2006/112/EC on the common system of value added tax
Date: 2021-02-11
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Northern Ireland, United Kingdom, VAT, consumption, copyright exception, greenhouse gas, motor fuel, motor vehicle, motor vehicle pollution, tax relief

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   EUROPEAN COMMISSION  Brussels, 11.2.2021  COM(2021) 53 final 2021/0030 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION authorising the United Kingdom in respect of Northern Ireland to apply a special measure derogating from Articles 16 and 168 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’1), 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. 

The United Kingdom  has  left  the European Union (EU) on 31 January 2020.  In accordance 
with the Withdrawal Agreement2, it is now a third country to the EU. 

As  from  1  January  2021,  the  EU  VAT  legislation  is  no  longer  applicable  in  the  United 
Kingdom.  However, on  the basis of the Protocol on  Ireland/Northern  Ireland3  (hereafter the 
‘Protocol’), which is part of the Withdrawal Agreement, Northern Ireland remains under the 
EU VAT legislation regarding goods with a view to avoiding a hard border between Ireland 
and Northern Ireland. For services, on the other hand, Northern Ireland is, together with the 
rest of the United Kingdom, considered as outside the EU. 

This inevitably leads to a dual or mixed VAT system in Northern Ireland whereby supplies, 
intra-Community acquisitions and importations of goods that are located in Northern Ireland, 
according to  the rules  on the place of taxable transactions laid down in Title V of the VAT 
Directive,  are  subject  to  the  harmonised  EU  rules,  while  supplies  of  services  made  in  that 
same territory are not subject to the EU VAT system. 

Therefore, to continue applying in Northern Ireland a special scheme on VAT, which provides 
for  flat-rate  measures  in  respect  of  non-deductible  value  added  tax  charged  on  fuel 
expenditure  in  company  cars,  which  deviate  from  the  general  rules  laid  down  in  the  VAT 
Directive,  the  granting  of  a  derogation  pursuant  to  Article  395(1)  of  the  VAT  Directive  is 
needed. 

By  letter  registered  with  the  Commission  on  27  November  2020,  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 Member States by letter  dated 10 December 2020 of the request 
made by the United Kingdom. By letter dated 11 December 2020, the Commission notified 
United Kingdom  that it  had all the information  it  considered necessary for appraisal of the 
request. 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

Article  168  of  the  VAT  Directive  provides  that  a  taxable  person  is  entitled  to  deduct  VAT 
charged  on  purchases  made  for  the  purpose  of  taxed  transactions.  Article  16  of  the  same 
Directive requires the application by a taxable person of goods forming part of his business 
assets  for  his  private  use  or  for  that  of  his  staff  to  be  treated  as  a  supply  of  goods  for 
consideration, where the VAT on those goods or the component parts thereof was wholly or 
partly deductible. This system allows for the recovery of initially deducted VAT in relation to 
the private use. 

1 
2 

3 

OJ L 347, 11.12.2006, p. 1. 
Council  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  C384  I  of  12.11.2019, 
p. 1). 
OJ C384 I of 12.11.2019, p. 92. 

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In  the  case  of  company  cars,  partly  used  for  private  (non-business)  purposes,  it  is  often  a 
difficult matter to calculate and to tax expenditure related to 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  of  company  cars  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  cars4,  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 taxes5, introducing a flat rate taxation of the private 
use on the basis of the car’s CO2 emission rating. The latter Council Decision was on its turn 
replaced by Council Implementing Decision (EU) 2015/2109 of 17 November 20156, which 
expired on 31 December 2018. A further extension of the measure, until 31 December 2020, 
was granted by Council Implementing Decision (EU) 2018/1918 of 4 December 20187. 

The 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  due  on  the  private  use  of  the  vehicle.  The  system  is  optional  for  taxable 
persons  who  may  choose  not  to  recover  VAT  on  their  fuel.  Alternatively,  they  may  keep 
detailed  mileage  records  to  provide  evidence  and  support  a  calculation  of  their  private 
mileage. 

The  United  Kingdom  included  in  its  request  an  explanation  on  the  functioning  of  the 
derogating measure. 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. The 
United  Kingdom  also  submits  that  it  provides  taxable  persons  with  legal  certainty  by 
providing a simplified method which can be used to account for VAT on private use of fuel.  

On  this  basis,  the  United  Kingdom  in  respect  of  Northern  Ireland  has  requested  to  be 
authorised to continue the application of the derogation from 1 January 2021. The derogation 
should be limited in time to 31 December 2023, so that it can be assessed whether the flat-rate 
scheme is still a correct reflection of the overall apportionment between business and private 
use. 

• 

Consistency with existing policy provisions in the policy area 

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.  

4 
5 
6 
7 

OJ L 212, 2.8.1986, p. 35. 
OJ L 272, 3.10.2006, p. 15. 
OJ L 305, 21.11.2015, p. 49-50.  
OJ L 311, 7.12.2018, p.30-31. 

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

• 

Proportionality 

The Decision concerns an authorisation granted to the United Kingdom in respect of Northern 
Ireland 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 individually. 

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  in  respect  of  Northern 
Ireland and concerns only this territory. 

• 

Collection and use of expertise 

There was no need for external expertise. 

• 

Impact assessment 

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

8 

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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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 implications for the Union budget. 

In this context, it is reminded that, in accordance with the second paragraph of Article 8 of the 
Protocol, revenues resulting from transactions that are taxable in Northern Ireland shall not be 
remitted to the EU.  

5. 

OTHER ELEMENTS 

The proposal includes a sunset clause;  an automatic time limit which is set at 31 December 
2023. 

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2021/0030 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising the United Kingdom in respect of Northern Ireland to apply a special 
measure derogating from Articles 16 and 168 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) 

(5) 

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The United Kingdom withdrew from the European Union on 31 January 2020 on the 
basis 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  (‘the  Withdrawal  Agreement’).  Thus,  Union  legislation  on  value  added 
tax (‘VAT’) is no longer applicable to or in the United Kingdom. 

However,  in  accordance  with  Article  8  of  the  Protocol  on  Ireland/Northern  Ireland 
(‘the  Protocol’),  which  forms  an  integral  part  of  the  Withdrawal  Agreement,  Union 
legislation on VAT continues to apply in Northern Ireland2 as regards goods. 

Therefore,  taxable  persons  and  certain  non-taxable  legal  persons  in  the  United 
Kingdom continue to be subject to Union legislation on VAT for transactions in goods 
in Northern Ireland. 

Article  168  of  Directive  2006/112/EC  provides  that  a  taxable  person  is  entitled  to 
deduct  VAT  charged  on  purchases  made  for  the  purpose  of  taxed  transactions. 
However, Article 16 of that Directive requires  the application by a taxable person of 
goods forming part of his business assets for his private use or for that of his staff to be 
treated as a supply of goods for consideration, where the VAT on those goods or the 
component parts thereof was wholly or partly deductible.  This  system allows for the 
recovery of initially deducted VAT in relation to the private use.  
By  Council  Decision  2006/659/EC3,  the  United  Kingdom  was  authorised  to  apply, 
until  31 December 2015, a special measure in  order to  determine on a flat-rate basis 
the proportion of non-deductible VAT relating to expenditure on fuel in business cars 
not  exclusively  used  for  business  purposes  (“the  special  measure”).  The  special 
measure, which is optional for taxable persons, is based on the level of carbon dioxide 

OJ L 347, 11.12.2006, p. 1. 
Subject to the democratic consent, referred to in Article 18 of the Protocol, to the continued application 
of Article 8 thereof. 
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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(6) 

(7) 

(8) 

(9) 

emissions  from  the  car,  as  there  is  a  proportional  correlation  between  emissions  and 
fuel consumption and therefore with expenditure on fuel. 
By  Council  Implementing  Decision  (EU)  2015/21094,  the  United  Kingdom  was 
authorised  to  continue  applying  the  special  measure  until  31  December  2018.  A 
further  extension,  until  31  December  2020,  was  granted  by  Council  Implementing 
Decision (EU) 2018/19185. 

By letter registered with the Commission on 27 November 2020, the United Kingdom 
in respect of Northern Ireland requested authorisation to continue to apply the special 
measure from 1 January 2021. The request included an explanation on the functioning 
of the special measure.  

The Commission transmitted the request made by the United Kingdom to the Member 
States  by  letter  dated  10  December  2020.  By  letter  dated  11  December  2020,  the 
Commission notified the United Kingdom that it had all the information necessary to 
consider the request. 

According  to  the  United  Kingdom,  the  special  measure  has  provided  an  efficient 
simplified procedure for collecting VAT in relation to expenditure on fuel for business 
cars partly used for private purposes, for both taxable persons and the tax authority. It 
is  therefore  appropriate  that  the  United  Kingdom  in  relation  to  Northern  Ireland  be 
authorised to continue to apply the special measure. 

(10)  The derogation should be limited in time  to 31 December 2023, as it is necessary to 
periodically  reassess  whether  the  flat-rate  scheme  continues  to  correctly  reflect  the 
overall apportionment between business and private use. 

(11) 

In  accordance  with  the  second  paragraph  of  Article  8  of  the  Protocol,  revenues 
resulting from transactions that are taxable in Northern Ireland are not to be remitted 
to the Union. Therefore, the special measure will have no impact on the Union's own 
resources accruing from VAT, 

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Articles  16  and  168  of  Directive  2006/112/EC,  the  United 
Kingdom  in  respect  of  Northern  Ireland  is  authorised,  until  31  December  2023,  to  fix  on  a 
flat-rate basis the proportion of VAT relating to expenditure on fuel used for private purposes 
in business cars. 

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5 

Council  Implementing  Decision  (EU)  2015/2109  of  17  November  2015  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 (OJ L 305, 21.11.2015, p. 49).  
Council Implementing Decision (EU) 2018/1918 of 4 December 2018 authorising the United Kingdom 
to  apply  a  special  measure  derogating  from  Articles  16  and  168  of  Directive  2006/112/EC  on  the 
common system of value added tax (OJ L 311, 7.12.2018, p. 30). 

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Article 2 

The  proportion  of  the  tax  referred  to  in  Article  1  shall  be  expressed  in  fixed  amounts, 
established  on  the  basis  of  the  carbon  dioxide  emission  level  of  the  type  of  vehicle,  that 
reflects  fuel  consumption.  The  United  Kingdom  in  respect  of  Northern  Ireland  shall  adjust 
those 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 

Article 4 

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

Done at Brussels, 

For the Council 
The President 

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