Modernising VAT in the EU

12 May 2016

The current EU VAT system, in place since 1993, is about to undergo a significant ‘reboot’ should all 28 member states agree the European Commission’s (EC) proposals in its action plan on VAT.

The action plan gained publicity during the recent Budget when the Government cited it as the mechanism by which sanitary products could be VAT zero-rated, and by which VAT at the reduced rate could be maintained on the supply of energy-saving materials. In this respect, the EC’s proposals give two options regarding reduced rates: the extension and regular review of existing reduced rates, or the abolition of the reduced rate list.

Aims and objectives

The primary objective of the proposals, however, is a simplified single VAT area for businesses, whilst at the same time reducing the occurrence of VAT fraud in cross-border, intra-community supplies. It is this interaction of VAT simplification and the curbing of VAT fraud that may, nonetheless, prove to be the most contentious to both businesses and governments across member states.

Achieving the outcomes envisaged in the EC’s proposals requires unanimity between all member states. This would necessitate all member states to exchange information and the agreement of a modernised VAT rates policy, compliant with EU regulations and governance, which avoids tax competition within the single market. If such an agreement can be achieved, there would then need to be significant changes in accounting and reporting of VAT on all intra-community supplies.

Potential changes

Directly impacting SMEs is the extension of the Mini One Stop Shop (MOSS) mechanism to EU and non-EU online sales of tangible goods to final consumers, with a threshold below which registration for MOSS would not be required.

The most significant of the proposed changes will impact the accounting and reporting of cross-border B2B supplies. Since 1993, transitional arrangements have meant that intra-community supplies have been free of VAT, with the customer accounting for VAT on his acquisition of goods, or services in his home country and applying the rate of VAT applicable in his home country. The new proposals, however, aim to ensure that VAT is accounted for on a destination principle.

Therefore, in all intra-community supplies of both goods and services, VAT would be charged under the rules of the originating country, at the VAT rate applicable in the destination country. Such a dramatic shift of emphasis will require significant changes to VAT accounting and reporting and will, subject to a transition period, be facilitated by the extension of the MOSS system to B2B supplies.

Whilst this may seem to place an undue burden on businesses involved in intra-community trade, it does negate the need, under the destination principle, for a business to register for, file and pay VAT in every EU country in which it trades.

Before the action plan is implemented, there is, however, the not insignificant issue of a UK referendum on EU membership. Whatever the result of this vote, there will be changes to how UK businesses account for VAT on supplies to and from other EU member states.

For further information, please contact Ian Carpenter, or your usual RSM contact.