Somewhat overshadowed by the fallout from the ‘Panama Papers’, the European Commission last week unveiled its much anticipated Action Plan on VAT.
This is the pan-EU action plan heralded during the Budget as affording the UK the ability to apply VAT at the zero-rate to sanitary products, and continue to afford VAT at the reduced-rate to solar panels and other energy-saving materials.
While the Action Plan certainly addresses the opportunity for Member States to agree to the extension and regular review of existing reduced rates, or even to abolish the list of existing reduced rates and implement and follow the reduced rate policy they wish, the overarching aim is to put in place a definitive VAT system which would not only make it ‘simpler’ for businesses to use, but would also reduce cross-border VAT fraud.
The EU estimates that, as a result of weaknesses in the current VAT system, and the way in which it is administered across the EU, cross-border VAT fraud alone accounts for EUR 50 billion of revenue lost each year.
To address this, the EU therefore seeks to improve co-operation between Member States’ tax authorities by affording Eurofisc - a network of national civil servants set up for the rapid exchange of targeted information on VAT fraud – direct access to relevant information held in different Member States; a sort of ‘country-by-country’ reporting by tax authorities.
Businesses will also be required to play their part. Under current EU VAT accounting rules, a company in Country A can sell goods to a company in Country B without VAT being added, the company in country B accounts for VAT and pays this over to the treasury of Country B when the product has been sold on.
The EU’s proposal for a ‘single EU VAT area’ aims to treat cross-border the same way as domestic transactions, resulting in significant changes regarding accounting and reporting for B2B supplies.
Replacing the current ‘VAT-free’ intra-EU model, the Action Plan envisages the company in member state A applying member state B's VAT rate, and paying this over to the tax authorities in member state A. The One-Stop-Shop currently being applied to B2C e-services will therefore have to be adapted to accommodate B2B supplies of goods and services.
The EU considers that this change alone should help reduce cross-border VAT fraud by EURO 40 billion per year. Given that the budget of the European Communities is financed wholly from the Communities’ own resources - which includes a uniform rate 0.30 per cent of a member state’s VAT revenues - it should therefore come as no surprise that the European Commission considers that ‘it is time for the creation of a genuine single EU VAT area for the single market’. In this light, zero-rated sanitary products and reduced-rate solar panels are just a bonus.
If you would like any more information on this issue please contact Ian Carpenter.