New rules to give EU member states more flexibility to set VAT rates have been proposed by the European Commission.
The EU’s common VAT rules—agreed by all member states in 1992—are out of date and too restrictive, the Commission said, allowing member states to apply reduced VAT rates to only a handful of sectors and products.
As well as granting members states greater autonomy to set VAT rates, the proposed reforms aim to help reduce the €50bn lost to VAT fraud each year in the EU, while cutting red tape for small businesses and securing government revenues.
Businesses trading cross-border face 11% higher compliance costs compared with those trading only domestically, with smaller players hit hardest, a Commission statement said. “This is proving to be a real obstacle to growth, as small businesses make up 98% of companies in the EU.
“We are therefore proposing to allow more companies to enjoy the benefits of simpler VAT rules which are at the moment available to only the smallest firms. Overall VAT-related compliance costs will be cut by as much as 18% per year.”
Member states can currently apply a reduced rate of as low as 5% to two distinct categories of products in their country. Under the proposed reforms, in addition to a standard VAT rate of minimum 15%, member states would be able to introduce two separate reduced rates of between 5% and the standard rate chosen by the member state; one exemption from VAT (or “zero rate”); and one reduced rate set at between 0% and the reduced rates.
Goods and services
The current list of goods and services to which reduced rates can be applied would be abolished and replaced by a new list of products (such as weapons, alcoholic beverages, gambling and tobacco), to which the standard rate of 15% or above would always be applied. Member states will, however, have to ensure the weighted average VAT rate is at least 12% to ensure public revenues are safeguarded.
A €2m revenue threshold across the EU would be introduced, under which small businesses would benefit from simplification measures (whether or not they have already been exempted from VAT), while a turnover threshold of €100,000 would allow companies operating in more than one member state to benefit from the VAT exemption.
Member states will also be allowed to free all small businesses that qualify for a VAT exemption from obligations relating to identification, invoicing, accounting or returns.
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.