As part of its Action Plan on VAT towards a single EU VAT area (presented in April 2016), and following proposals published in October 2017 for a new definitive single EU VAT area, the European Commission has proposed new rules amending Directive 2006/112/EC to give Member States more flexibility when setting VAT rates.

Last year, the European Commission opened a public consultation considering two broad options for the reform of the VAT rate system:

• The first option was to keep the standard VAT rate of 15% and regularly update the list of goods and services eligible for reduced rates, on the basis of Member States suggestions.
• The second option was remove the minimum rate of 15% and abolish the list of reduced and zero rates.

The European Commission has decided to progress a version of the second option and full details are outlined below.

*Update* The Charity Tax Group has been working with colleagues at the European Charities’ Committee on VAT (ECCVAT) in support of their response to a consultation on their proposals – the full response can be read here.

VAT rates

In addition to keeping a standard VAT rate of minimum 15%  the European Commission has proposed that Member States be now able to put in place:

• two separate reduced rates of between 5% and the standard rate chosen by the Member State
• one reduced rate set at between 0% and the reduced rates
• one zero rate

The current list of goods and services (Annex III), to which reduced rates can be applied, would be abolished and replaced by a negative list (a new Annex IIIa), to which reduced rates cannot be applied (the standard rate of 15% or above would therefore always be applied to the goods and services mentioned on the list). This would include items such as weapons, alcoholic beverages, gambling and tobacco.

Member States will have to ensure that the weighted average VAT rate applied to those transactions for which VAT cannot be deducted is at least 12%. This is designed to safeguard revenues. It remains to be seen exactly how this will operate in practice and whether it will include existing reduced and zero rated supplies.

The new regime would also mean that all goods currently enjoying rates different from the standard rate can continue to do so. Existing reduced rates, including derogations, that are legally applied in Member States will expire with the introduction of the definitive VAT regime which is currently being negotiated in the Council. These proposals mean that, even once these derogations expire, countries will be able to maintain the reduced rates with very few exceptions. It will also allow all other Member States to apply similar derogations if they so wish.

VAT for SMEs

The European Commission has also proposed to reduce VAT costs for SMEs. While current exemption thresholds will remain in place, the proposals would introduce:

• A €2m revenue threshold across the EU, under which small businesses would benefit from simplification measures whether or not they have already been made exempt from VAT
• 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
• A turnover threshold of €100,000 which would allow companies operating in more than one Member State to benefit from the VAT exemption.

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.