European Commission proposes simplified VAT regime

The European Commission on Thursday announced a series of proposals aimed at giving member States greater flexibility in setting their value-added tax (VAT) rates, with certain conditions, and making life easier for small and medium sized businesses.

Rather than a system based on exceptions, the Commission wishes to move on to a system of general rules applicable throughout the European Union (EU).

“Today we are taking another step towards creating a single VAT area for Europe, with simpler rules for our Member States and companies,” said Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, on Thursday (18 January).

“These proposals will give EU countries greater freedom to apply reduced VAT rates to specific products or services. At the same time they will reduce red tape for small businesses operating across borders, helping them to grow and create jobs.”

To safeguard public revenues, Member States will have to ensure that the weighted average VAT rate is at least 12%, but Member States would also be able to apply a limited number of reduced rates, between 5% and 15%, between 0% and 5%, and a 0% rate.

Certain goods and services would not benefit from reduced VAT rates. Some 1,600 of these, including tobacco, smart phones, weapons and oil products, would remain on a new “negative list”. Up until now, only listed goods and services could benefit from reduced rates and these did not include, for example, Internet services, e-books or equestrian activities.

The Commission also wants to make life simpler for SMEs by applying a common, EU-wide turnover threshold under which businesses could benefit from simpler VAT rules. Micro-enterprises – those with annual turnovers of 100,000 euros or less in Europe – would have the same possibility of being exempted from VAT in all European countries where they are present.

“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,” the Commission said in a press release on Thursday.

“The amendments will become effective only when the switch to the definitive regime effectively takes place,” it added. The Commission estimates that overall VAT-related compliance costs will be cut by as much as 18% per year and that the €50 billion lost to VAT fraud each year in the EU will be reduced.

The Association of Chartered Certified Accountants (ACCA), whose members will have to audit the compliance with the new VAT rules, welcomed the proposals.

Chas Roy-Chowdhury, Head of Taxation at ACCA said that, “In a dynamic tax environment there needs to be flexibility around the 12% rate, to take into account lower revenues in periods of recession.“

Regarding creating a better tax environment for SMEs, he said the new thresholds for small businesses are important for their ability to grow and will also support cross-border trade.

He concluded that, “The ball is now in the camp of Member States, and negotiations may prove complicated, as some are not in favour of the introduction of the definitive VAT regime.”

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