Proposal for a COUNCIL DECISION authorising the United Kingdom to introduce a special measure derogating from Article 11 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Under Article 27 of the Sixth Council Directive 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 assessment, [1] the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of the Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.

[1] OJ L 145, 13.6.1977, p. 1. Directive as last amended by Directive 2004/15/EC (OJ L 52, 21.2.2004, p. 61).

2. In a request submitted by letter addressed to the Commission and registered by the Commission's Secretariat-General on 13 February 2004, the Government of the United Kingdom sought authorisation to introduce a measure derogating from Article 11(A)(1)(a) of Directive 77/388/EEC. The Commission informed the other Member States of the UK's request in a letter dated 15 March 2004.

3. The request was received in the Commission prior to the amendments to Art 27 contained in Council Directive 2004/7/EC coming into force. However, in the absence of any transitional rules the application falls to be completed under the current, rather than the former, rules.

4. Article 11(A)(1)(a) of Directive 77/388/EEC establishes the taxable amount of a supply to be "everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser .....". This provision is normally sufficient in cases where the supply has a true commercial purpose and where there is no connection between the supplier and purchaser which would affect the value of the supply. However where the parties to the transaction are connected there is evidence that some supplies are made below the market value. The UK already has a derogation from Article 11 to deal with such undervalued supplies of goods or services made to connected parties where there is likely to be a loss of tax by virtue of the recipient being exempt or partly exempt. [2] This derogation empowers the authorities to call for tax on the full open market value of such a supply. Although the scheme which is the subject of this derogation request is similar to those already countered by the existing derogation, the basis on which the original derogation was applied for is not sufficiently wide to cover the amended scheme.

[2] OJ L 132, 21.5.1987, p. 22.

5. The UK has now made a request for an additional, narrowly targeted, derogation to enable them to counter tax avoidance in relation to supplies between employer and employee within the motor trade sector. Existing Community legislation in Art 6(2) creates a supply of services for consideration when goods forming part of the assets of the business and on which tax is eligible for deduction are made available for the private use of staff. The valuation of this supply is governed by Art 11(A)(1)(c) which requires the taxable person to account for tax on the full cost of providing the service. However, in the cases encountered by the UK, this legislation is circumvented by the employer making a charge. This has the effect of bringing the value of the supply within the ambit of Article 11(A)(1)(a). Tax is only therefore charged on the amount actually paid by the employee, which is set at a level which is clearly only available because of their employment tie.

6. The abuse identified by the UK is currently limited to the motor industry. Businesses are entitled to recover tax on cars which form part of the stock in trade of a motor manufacturer or a motor dealer. The most common example is the demonstrator car. Demonstrator cars are often made available to employees out of working hours. If the demonstrator was made available without any charge, because there has been a deduction of tax, under existing rules the supply should be taxed on the basis of the full cost to the taxable person in providing the car. However, because the employee pays a sum for the use of the car this valuation provision is suspended and the normal rule in Article 11(A)(1)(a) applies. VAT is therefore accounted for by reference to the amount actually paid. Since the employee and employer are connected, the charge for the car can be set at an artificially low level. This enables the employer to confer a considerable benefit on the employee.

7. This avoidance scheme has been marketed in the UK. Because motor vehicles are high value goods and because of the volume made available to employees, the UK government has assessed that in addition to the amounts already being lost, there could be a significant tax loss if the scheme was used more widely. The UK has applied for a derogation which would directly tackle the scheme rather than a more general derogation, believing that the abuse is limited to one particular market sector. A targeted derogation also means that the remedial measures are proportionate to the problem.

8. The scheme is limited to the motor trade because in general, VAT on cars purchased by businesses in the UK is not recoverable where there is any private use of the car. This block acts as a proxy for taxing the private use and their use by private individuals is therefore accounted for. An exception to this is businesses in the motor trade who hold cars as stock in trade and are able to recover tax. Any private use of these cars should therefore be subject to tax.

9. In view of the above, the Commission considers that the derogation requested by the UK Government should be authorised.

Proposal for a COUNCIL DECISION authorising the United Kingdom to introduce a special measure derogating from Article 11 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to 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 assessment [3] and in particular Article 27 thereof,

[3] OJ L 145, 13.6.1977, p. 1. Directive as last amended by Directive 2004/15/EC (OJ L 52, 21.2.2004, p. 61).

Having regard to the proposal from the Commission [4],

[4] OJ [...] C [...], p. [...].

Whereas:

(1) In a letter registered by the Secretariat-General of the Commission on 13 February 2004, the United Kingdom sought authorisation to introduce a special measure derogating from Article 11(A)(1)(a) of Directive 77/388/EEC;

(2) The aim of the derogation is to prevent the avoidance of value added tax (VAT) through the undervaluation of supplies. It is specifically designed to prevent the circumvention of Article 6(2) of Directive 77/388/EEC through the practice, within the motor vehicle trade, of allowing staff the use of cars for a nominal charge. Since that charge appears to be consideration for the supply, VAT is levied under Article 11(A)(1)(a) of Directive 77/388/EEC on the actual amount paid by the employee. However, because of the employment link between the two parties, the amount actually paid is artificially low, resulting in significantly smaller VAT revenues.

(3) The United Kingdom has already been granted a request for a derogation from Article 11 [5] designed to tackle the problem of undervalued supplies between connected persons where the recipient of the supply is totally or partially exempt. Since, at the time when that derogation was granted, employees were not included within the definition of "connected" and since an employee is not a taxable person who is totally or partially exempt, a further and more specific derogation is required.

[5] OJ L 132, 21.5.1987, p. 22.

(4) The special measure should apply only in cases where the administration is able to conclude that the taxable amount as determined in accordance with Article 11(A)(1)(a) has been influenced by the employment ties between the parties involved. That conclusion must, in each case, be based on manifest facts, not presumptions.

(5) Given the limited scope of the derogation, the special measure is proportionate to the aim pursued;

(6) The derogation has no negative impact on the Community's own resources from value added tax;

HAS ADOPTED THIS DECISION:

Article 1

By way of derogation from Article 11(A)(1)(a) of Directive 77/388/EEC, the United Kingdom is authorised, until 31 December 2008, in the case of a supply of services consisting in the use of a motor car, where the supplier and the recipient are connected persons in the motor trade, to treat the open market value of that supply as the taxable amount.

Article 2

Article 1 shall apply only if the following conditions are met:

(a) the supplier has the right to deduct, in whole or in part, the value added tax applied to the motor car;

(b) the recipient is not a fully taxable person and is linked to the supplier by employment ties specified in national legislation;

(c) it is reasonable to conclude from the circumstances of the case that the employment ties referred to in point (b) have influenced the taxable amount as determined in accordance with Article 11(A)(1)(a) of Directive 77/388/EEC.

Article 3

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

Done at Brussels, [...]

For the Council

The President