EU member states to get more flexibility on setting VAT rates

As part of the Fair Taxation Package, the Commission today proposed a reform of the EU laws that currently govern the setting of VAT levels by member states. It also proposed measures to reduce VAT costs for small businesses within the EU, such as by simplifying their administrative burdens.

Creating a single EU VAT area

The Commission said the reform would help create a single EU VAT area, and also help to reduce the €50 billion lost to VAT fraud in the EU each year, securing government revenue.

Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici summed up the proposals as “common rules where necessary for the functioning of the internal market; greater flexibility for governments to reflect their policy preferences through their VAT rates.”

The Commission said that the current VAT rules, agreed in 1992, were ‘out of date and too restrictive’, stating they allowed member states to apply reduced VAT rates to only a handful of sectors and products.

It also proposed to let more companies enjoy the benefit of simpler VAT rules, meaning that overall VAT related compliance costs could be cut by as much as 18% per year. It highlighted that businesses trading across borders could face 11% higher compliance costs compared to those trading domestically only.

More flexibility setting VAT rates

EU member states can currently only apply a reduced rate of as low as 5% to 2 distinct categories of products in their country, with a number of member states applying a specific derogation for further reduced rates. These derogations also have to be agreed unanimously by the Council, which can make it harder to introduce them.

The general minimum VAT rate of 15% would remain unchanged, but member states could now put in place one rate of 0%, two separate reduced rates of between 5% and the standard rate chosen by a Member State, and another rate set between 0% and the reduced rates under the new rules. Most of the current derogations could continue to be applied should member states so want.

To safeguard public revenue, the Commission said that Member States need to have a weighted average VAT rate of at least 12%. It also wants to ensure that the reduced rates benefit the consumer, and are reflected in the final price of products.

The list of goods and services which reduced rates can be applied to would be abolished and replaced by a new list of products (such as weapons, alcohol, gambling, tobacco) to which the standard rate of 15% or above would always be applied.

Reducing VAT compliance costs for small businesses

The Commission proposes to introduce a €2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures. It would also allow 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.

Finally, a turnover threshold of €100,000 would be introduced, allowing companies operating in more than one Member State to benefit from the VAT exception. Under the current laws, these rules don’t apply cross-border.

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