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(BRUSSELS) – The European Commission proposed Thursday new rules which would give EU Member States more flexibility to set Value Added Tax (VAT) rates and to create a better tax environment to help SMEs flourish.
The proposals are the final steps of a broader overhaul of VAT rules, with the creation of a single EU VAT area to dramatically reduce the 50 billion lost to VAT fraud each year in the EU, while also supporting business and securing government revenues.
“Today we are taking another step towards creating a single VAT area for Europe, with simpler rules for our Member States and companies, ” said Financial Affairs Commissioner Pierre Moscovici: “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. In short: common rules where necessary for the functioning of the internal market; and greater flexibility for governments to reflect their policy preferences through their VAT rates.”
VAT is a major and growing source of revenue in the EU, raising over EUR 1 trillion in 2015, which corresponds to 7% of EU GDP. One of the EU’s own resources is also based on VAT.
Current common VAT rules allow Member States to apply reduced VAT rates to only a handful of sectors and products. At the same time, the Commission recognises that EU countries consider VAT rates as a useful instrument to pursue some of their political objectives.
The new proposals would give Member States more autonomy on rates. Countries will be on a more equal footing when it comes to some existing exceptions to the rules, known as VAT derogations.
The Commission has also addressed the problem of smaller companies suffering from disproportionate VAT compliance costs.
Businesses trading cross-border face 11% higher compliance costs compared to those trading only domestically, with smaller players hit hardest. With small businesses making up 98% of companies in the EU, this is seen as a real obstacle to growth. The EU executive is 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, it says.
Member States can currently apply a reduced rate of as low as 5% to two distinct categories of products in their country. A number of Member States also apply specific derogations for further reduced rates.
In addition to a standard VAT rate of minimum 15%, Member States would now be able to put in place:
- two separate reduced rates of between 5% and the standard rate chosen by the Member State;
- one exemption from VAT (or ‘zero rate’);
- one reduced rate set at between 0% and the reduced rates.
The current, complex 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.
To safeguard public revenues, Member States will also have to ensure that the weighted average VAT rate is at least 12%.
The new regime also means that all goods currently enjoying rates different from the standard rate can continue to do so.
Under current rules, Member States can exempt sales of small companies from VAT provided they do not exceed a given annual turnover, which varies from one country to the next. Growing SMEs lose their access to simplification measures once the exemption threshold has been exceeded. Also, these exemptions are available only to domestic players. This means that there is no level playing field for small companies trading within the EU.
While the current exemption thresholds would remain, today’s proposals would introduce:
- A 2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures, whether or not they have already been exempted from VAT;
- 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;
- A turnover threshold of 100,000 which would allow companies operating in more than one Member State to benefit from the VAT exemption.
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 amendments will become effective only when the switch to the definitive regime effectively takes place.
VAT for small businesses and setting VAT rates - background guide
