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European Commission proposes far-reaching reform of the EU VAT system

Nov 14, 2017
On 4th October The European Commission launched plans for the biggest reform of EU VAT rules in a quarter of a century. The reboot would improve and modernise the system for governments and businesses alike.

The EC says that over €150 billion of VAT is lost every year, meaning that Member States miss out on revenue that could be used for schools, roads and healthcare. Of this, around €50 billion - or €100 per EU citizen each year - is estimated to be due to cross-border VAT fraud. This money can be used to finance criminal organisations, including terrorism. It is estimated that this sum would be reduced by 80% thanks to the proposed reform. 

The proposed VAT reform would also make the system more robust and simpler to use for companies. The Commission wants a VAT system that helps European companies to reap all the benefits of the Single Market and to compete in global markets. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. Simplifying and modernising VAT should reduce these costs by an estimated €1 billion. 

The new proposal will fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.  The proposal will seek agreement on four fundamental principles: 

Tackling fraud:
VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government. 

One Stop Shop:

It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a 'One Stop Shop'. Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services. 

Greater consistency:
A move to the principle of 'destination' whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. This has been a long-standing commitment of the European Commission, supported by Member States. It is already in place for sales of e-services. 

Less red tape: 
Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called 'recapitulative statement'). 

Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue said: "We are proposing to renew the current VAT system, which was set up a quarter century ago on a temporary basis. We need a definitive system that allows us to deal more efficiently with cross-border VAT fraud.” 

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Twenty-five years after the creation of the Single Market, companies and consumers still face 28 different VAT regimes when operating cross-border. This anachronistic system based on national borders must end!” 

The announcement also came as welcome news to Tony Richman who lobbied the EC and the EU authorities on behalf of FEDEMAC for many years arguing for a VAT One Stop Shop such as is now being proposed to end the impracticable rules that have faced European removers since 1993.  “It was a huge uphill struggle as taxation is one of the matters that needs unanimous agreement by all Member States rather than the usual qualified majority for many other topics,” he said. “Before I retired the Commission indicated to me that the extensive lobbying I had undertaken had been taken into account and a solution would probably be agreed by 2019/2020. Whilst Brexit will now have a profound affect upon UK removers it is nonetheless 'rewarding' for me to see that the 'promises' appear to have been kept.”  Tony added that lobbying is always is a slow and laborious task, totally different from the fast decisions that removers and other entrepreneurs have to make on a daily basis in running their own businesses.  

Certified Taxable Person 
The proposal also introduces the notion of a Certified Taxable Person – a category of trusted business that will benefit from much simpler and time-saving rules. Four 'quick fixes' have also been proposed, to come into force by 2019. These short-term measures were explicitly requested by Member States to improve the day-to-day functioning of the current VAT system until the definitive regime has been fully agreed and implemented. 

Next steps 
This legislative proposal will be sent to the Member States in the Council for agreement and to the European Parliament for consultation. The Commission will follow this initiative in 2018 with a detailed legal proposal to amend the so-called 'VAT Directive' at technical level so that the definitive VAT regime proposed can be smoothly implemented. 


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