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European Commission publishes 'far-reaching' plans for single VAT system

Plans to simplify and modernise EU VAT laws will dramatically decrease cross-border fraud while cutting compliance costs for businesses, the European Commission has said.06 Oct 2017

It has published plans for a "new and definitive" EU VAT system (11-page / 264KB PDF), with more simple and harmonised rules making it easier for companies to do business across borders. The proposals, which do not seek to harmonise the VAT rates charged by individual member states, would allow businesses to declare and pay their cross-border VAT liabilities via a single 'one stop shop' online portal.

The current EU VAT rules came into force in 1993 with the creation of the Single Market, but were intended as a transitional regime. The system is fragmented and overly complex, and has been unable to keep up with the 'digital economy' and related growth in cross-border and online sales, according to the Commission.

Pierre Moscovici, the EU's commissioner for economic affairs, said that loopholes in the "anachronistic" current system had been exploited for too long by "criminals and possibly terrorists", costing the EU around €50 billion in each year.

"Today's proposal is expected to reduce cross-border VAT fraud by around 80%," he said. "At the same time, it will make life easier for EU companies trading across borders, slashing red tape and simplifying VAT-related procedures. In short: good news for business, consumers and national budgets, bad news for fraudsters."

The Commission intends for its package of reforms to be in place by 2022, with the agreement of member states. In the meantime, it is seeking agreement on four 'quick fixes' to improve the day-to-day functioning of the current VAT system, which it hopes to put in place by 2019.

VAT was originally put in place to do away with the 'turnover taxes' imposed by member states, which were seen as distorting competition and hindering the free movement of goods by imposing unnecessary fiscal checks and formalities at internal borders. VAT is one of the most growth-friendly forms of taxation and is a major and growing source of EU revenue, raising over €1 trillion in 2015 or 7% of EU GDP.

The reforms proposed by the Commission are based around four 'cornerstones', on which member states must be able to agree. Firstly, VAT would be charged on cross-border trade between businesses in the EU for the first time, removing one of the easiest loopholes for fraudsters. Under the current system, a fraudster can import goods VAT-free and then charge VAT when reselling them without remitting it to tax authorities, or can pretend to transport goods to another member state while in fact selling them on VAT-free locally.

Under the new system, VAT would be charged on goods based on the 'destination' principle, which already applies to sales of e-services. The VAT would be payable to the member state of the final consumer and at the rate charged by that member state. Traders would be able to make declarations and payments via a single 'one stop shop' in their own language, while member states would then pay the VAT to each other directly. Again, the 'one stop shop' mechanism already operates for cross-border sales of e-services.

Finally, the Commission intends to simplify the invoicing rules so that sellers can prepare invoices according to the rules of their own country even when trading across borders. Companies would no longer have to prepare and submit a list of their cross-border transactions to their own tax authority.

The proposal also creates a new category of 'certified taxable persons', or trusted businesses that will benefit from simpler, time-saving rules. Companies that meet the criteria will be able to apply to their national tax authority for a certificate of their status, which will be mutually recognised by all member states. The Commission intends to create this new status by 2019, to allow these companies to benefit from the short-term 'quick fixes' set out in its proposal.

"This re-booting of the EU VAT system is further confirmation, if it were needed, of VAT's critical role in state finances," said tax expert Stuart Walsh of Pinsent Masons, the law firm behind Out-Law.com.

"It is high time that the 1993 'transitional rules', of which the UK was a key architect, were overhauled to reflect the dramatic changes in the EU and global economy. The question for Brexit Britain must be whether it is able to keep pace with the change: UK businesses are unlikely to want to be significantly out of step with developments across the channel," he said.