As expected, the European Commission has adopted an Action Plan on VAT – Towards a single EU VAT area. The Commission has produced a very helpful infographic explaining the scope of the proposed reforms as well as a detailed Q&A.

The Action Plan sets out immediate and urgent actions to tackle the VAT gap and adapt the VAT system to the digital economy and the needs of SMEs. It also provides a clear route towards a robust single European VAT area in relation to the definitive VAT system for cross-border supplies and, most importantly for charities, proposes options for a modernised policy on EU rules governing VAT rates.

It is reassuring that the Commission has confirmed that it will not scrap zero or reduced rates, but will instead give more flexibility to Member States on VAT rates, including the option for other countries to use zero rates. The Commission has put forward two options for giving Member States more freedom in relation to VAT:

• Extension and regular review of the list of zero and reduced rates
• Abolition of the list of zero and reduced rates

It is crucial that the implications of the reform proposals are scrutinised closely, to identify both risks and opportunities.

CTG has been liaising with European Commission officials in advance of the publication of the Action Plan to ensure that charities’ voices are heard in this review and has received the following update from a senior VAT policy officer:

“The current draft of the action plan does not contain any direct references to charity reliefs. However, we are fully aware of the fact that any amendment of the VAT rate structure could have impacts on charities, and wish to reassure you that this will be duly taken into account in formulating the Commission’s policy proposals.”

CTG has also been liaising with HMRC officials and expects to be involved in a series of events highlighting the potential threats and opportunities for the sector posed by this reform programme. CTG will also be working with European colleagues through the European Charities’ Committee on VAT (ECCVAT), which CTG Chairman John Hemming also leads.

Members will recall that we were originally expecting the Commission to produce proposals on the VAT treatment of public bodies, which would have also looked at the VAT treatment of charities.  We understand that this policy work is regarded as very difficult to resolve and that it is better to look at giving Member States more flexibility, as envisaged in the latest Action Plan.  We will want to consider whether, if implemented, the proposals in this latest plan will provide sufficient benefit for the sector or whether we need to continue to lobby for special reliefs.

 

The Future for VAT rates

Background

The VAT Directive sets out general rules limiting Member States’ freedom to set VAT rates. The rules were designed over two decades ago in the context of a definitive VAT system based on the origin principle. They were intended to guarantee, above all, the neutrality, simplicity and workability of the VAT system and featured lower limits on the levels of the VAT rates and a list of the goods and services which could benefit from reduced rates.

However, the decision to implement a definitive VAT system based on the destination principle requires a reflection about the consequences to be drawn for the rules governing VAT rates. In line with the subsidiarity principle, Member States could be granted greater autonomy on setting VAT rates, subject to appropriate safeguards to prevent excessive complexity and distortion of competition and to ensure that the operation of the Single Market is not affected.

Different VAT rates between physical and digital goods and services do not fully reflect today’s realities. Moreover, Member States feel unduly constrained in their rate-setting policy. The paradigm shift in the last few years towards the destination principle requires a broader reflection about the potential consequences for the VAT system and EU rules governing VAT rates.

Reform options

The Commission has confirmed that it will not scrap zero or reduced rates: instead it is aiming to modernise VAT rates policy and give more flexibility to Member States on VAT rates. The Commission has therefore put forward two options for giving Member States more freedom in relation to VAT.

Option 1) Extension and regular review of the list

• Maintain the minimum standard rate of 15%
• The list of goods and services that can benefit from reduced rates would be reviewed regularly, with Member States suggesting potential adjustments
• All currently existing reduced rates and derogations would be maintained. They could also be made available to all Member States to ensure equal treatment

Option 2) Abolition of the list

• Abolish the list of goods and services that can benefit from reduced rates
• Member States would have control of the number of reduced rates and their level they could put in place. But this would require safeguards to avoid unfair tax competition within the single market and to prevent fraud and could increase compliance costs
• Member States would also have to continue abiding by EU legislation, such as Single Market and competition rules and the EU’s economic governance framework

If an agreement is found on either of the Commission’s options for VAT rates, Member States would have more freedom to apply reduced VAT rates to certain additional sets of products.

• Under Option 1, all Member States will be able to cut rates on goods or services that are already included in the list. This would address the problem of unequal treatment. However, Member States would not be able to introduce completely new zero rates
• Under Option 2, Member States would be free to adopt the rates that they felt appropriate on their choice of goods and services, always provided that does not create risks of unfair tax competition or unduly complicate the VAT system

The proposals will also have no impact on increasing rates because that will remain at the discretion of Member States.

Next steps

The degree of autonomy on rates to be granted to Member States is not purely a technical matter, but requires political discussion. The Action Plan aims at initiating that political discussion with the Member States in the Council and in the European Parliament so that the Commission will be able to submit detailed legislative proposals in 2017,  based on a mandate from the Council.

 

Future EU VAT system for cross-border trade

The Commission intends to present a proposal in 2017 on definitive rules for a single European VAT area which will replace the current transitional VAT system which came into force in 1993. The new rules imply that cross-border transactions would continue to be taxed, as of today, at the rates of the Member State of destination but that the way taxes are collected would be gradually changed towards a more fraud-proof system.

The VAT on cross-border sales of goods or services would be collected by the tax authority of the originating country and transferred to the country where the goods or services are ultimately consumed. At the same time, an EU-wide web portal would be implemented to ensure a simple VAT collection system for businesses and a more robust system for Member States to gather revenue.

 

Immediate measures to tackle VAT fraud

To fight against cross-border VAT fraud, the Commission will propose measures later in 2016 to reinforce current tools used by Member States to exchange information about VAT fraud, fraud schemes and good practice.  The Commission will also monitor the performance of tax administrations in collecting and controlling VAT.

 

Support for e-commerce and SMEs

Because the current VAT system for cross-border e-commerce is complex and creates disadvantages between EU and non-EU traders who import VAT-free goods to the EU, by the end of 2016 the Commission will publish a legislative proposal to modernise and simplify VAT for cross-border e-commerce as part of the Digital Single Market strategy. This will include a proposal to ensure that e-publications can benefit from the same reduced rates as physical publications. In 2017, the Commission will present a VAT simplification package aimed at supporting the growth of SMEs and making it easier for them to trade across borders.