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EU VAT system

What lies ahead for VAT?

Ryan Bevan 4 May 2016 No comments


On 7 April 2016, the European Commission presented its “Action Plan on VAT” in which it set out steps for creating a single EU VAT area with a view to modernising the current VAT rules and addressing certain disadvantages of the VAT system.

In the Action Plan the Commission stated that the VAT system urgently needs reform in the following areas:

  • It needs to be simpler for businesses to use. Compliance costs are significantly higher in single market trade than in domestic trade , while complexity is stifling business, especially small and medium-sized businesses (SMEs);
  • It must combat the growing risk of fraud. The “VAT gap” between expected revenue and revenue actually collected is estimated at €170 billion, while cross-border fraud alone accounts for €50 billion of revenue loss each year;
  • It needs to be more efficient, in particular at exploiting the opportunities of digital technology and reducing the costs of revenue collection;
  • It must be based on greater trust: trust between business and tax administrations, and between EU tax administrations.

The Commission’s proposal is that the VAT system should be based on the principle of taxation in the country of destination of the goods and that rules under which the supplier of goods collects VAT from the customer will be extended to cross-border transactions. Under this system VAT would be charged according to the rules of the originating country of the supply but at the rate applicable in the country of consumption.

The VAT will be collected by the authorities of the originating Member State and remitted to the country where the goods or services are deemed to be consumed. It is estimated that this change would help reduce cross-border VAT fraud by €40 billion per year.  Implementing this change will be a major overhaul in the way VAT works.

The following additional key actions have been identified within the Action Plan to help address the current challenges:

  • Removing obstacles to intra-Community e-commerce, especially for small and medium-sized enterprises (SMEs), by extending the One Stop Shop mechanism (currently available to suppliers of Broadcasting, Telecommunications and e-services) to EU and non-EU online supplies of goods made to final consumers and introducing a threshold for start-up e-commerce businesses.
  • Taking urgent measures to tackle the VAT gap which will be aimed at improving cooperation between Member States and with third countries, improving voluntary compliance and increasing the efficiency of tax collection processes and the tax authorities.
  • Modernizing the VAT rates policy. The Commission intends to give more flexibility to Member States by either (1) reviewing and extending the list of goods and services eligible for reduced rates or by (2) abolishing the list altogether and allowing Member States greater freedom in setting the number of reduced rates and their level, provided this does not create tax distortions. In either case the current zero and reduced rates would be maintained.

The Commission intends to present proposals in each of these areas in 2016 and 2017.  These will be huge changes in the operation of VAT for businesses to get to grips with. Of course this may be something that UK businesses need not worry too much about if the UK votes Yes to Brexit – though that in itself would create a whole raft of other VAT issues!

Further information on the Commission’s proposal are available on their website.  This factsheet provides a useful summary of the planned changes.