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European Commission proposes new rules on VAT rates and simplifications for SMEs

carolineheath 19 January 2018 No comments

On 18 January 2018 the European Commission proposed new rules to give Member States more flexibility to set VAT rates and to create a better tax environment for SMEs.

Next step in 2016 VAT Action Plan  

The proposals build on the Commission’s 2016 VAT Action Plan which aims to overhaul current VAT rules and establish a robust single European VAT area fit for the modern world, leading to a more efficient and fraud-proof VAT system.

In a press release announcing the proposals, Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said:

“Today we are taking another step towards creating a single VAT area for Europe, with simpler rules for our Member States and companies. These proposals will give EU countries greater freedom to apply reduced VAT rates to specific products or services. At the same time they will reduce red tape for small businesses operating across borders, helping them to grow and create jobs. In short: common rules where necessary for the functioning of the internal market; and greater flexibility for governments to reflect their policy preferences through their VAT rates.”

The aims of the proposals

The aims of these proposals are:

  • to meet demands from Member States to have more flexibility to set rates, and
  • to extend VAT exemptions that exist for domestic companies to small companies trading cross-border.

Current rules on VAT rates

Current VAT rate rules agreed by all Member States allow for reduced rate of 5% or higher to be applied to a pre-defined list of goods and services. Some Member States also apply specific derogations for further reduced rates which were agreed when they joined the EU. This has resulted in a patchwork of rates that vary from one country to the next and created inequalities within the EU. Some Member States enjoy derogations, while others are not allowed to apply a reduced rate or zero rate to the same products or services.

The proposed definitive regime is based on taxation at destination instead of origin. Under this system restrictive rules on the application of rates are no longer essential to avoid distortion of competition.

Improved VAT rate setting flexibility

The new harmonised and flexible rules proposed will enable all Member States, in addition to the two reduced rates of a minimum of 5% and one 0% rate, to apply a third reduced rate of between 0% and 5%.

The current list of goods and services to which reduced rates can be applied will be abolished and replaced by a new list of products to which the standard rate of minimum 15% must always be applied. This list will include products such as weapons, alcoholic beverages, gambling and tobacco.

To safeguard public revenues, Member States must also ensure that the weighted average of all VAT rates applied is at least 12%.

VAT rules for SMEs – the current position

Member States are currently allowed to exempt from VAT supplies made by small businesses with an annual turnover below a given threshold. However, the VAT registration threshold is different in each Member State. Also, non-established small businesses are not able to take advantage of the thresholds in other Member States. There isn’t therefore a level playing field for small businesses trading within the European Union.

In addition, Member States may relieve unregistered businesses from certain or all VAT obligations relating to identification, invoicing, accounting or returns. Since only unregistered small businesses have access to such simplification measures, and there is no harmonisation across the Member States, this has a negative impact on the competitiveness of small enterprises that are VAT registered and have no access to the simplification measures.

Proposed SME simplification measures 

The new proposals will introduce an EU-wide threshold allowing many more companies to benefit from simpler rules.

While the current national VAT registration thresholds in Member States would remain, the proposed rules would introduce:

  • A €2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures, whether or not they are VAT registered;
  • The possibility for Member States to free all small businesses that qualify for a VAT exemption from obligations relating to identification, invoicing, accounting or returns;
  • An overall total EU turnover threshold of €100,000 which would allow companies operating in more than one Member State to benefit from the VAT exemption but prevent companies with large turnovers taking advantage of it.

The Commission estimate that the proposal will reduce the overall costs that SMEs face in complying with their VAT obligations by up to 18% per year. It should also provide a more level playing field for small businesses, whether operating domestically or cross-border in the single market.

Next Steps

These legislative proposals will now be submitted to the European Parliament and the European Economic and Social Committee for consultation and to the Council for adoption. The amendments will become effective only when the switch to the definitive regime effectively takes place.

Further information on the proposals can be found here and here.