Changes to VAT by EU Commission

On Wednesday 4 October the European Commission announced far reaching and fundamental changes to the VAT treatment of goods. These changes are being heralded as the most fundamental changes in 25 years. The aim is to modernise and simplify the VAT system both for businesses and governments. The changes come on the back of figures suggesting that over €150 billion of VAT is lost annually through cross border VAT fraud. The reforms are estimated to be able to reduce this amount by up to 80%.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “In short: good news for business, consumers and national budgets, bad news for fraudsters."

The changes would fundamentally changes the way goods are taxed when sent from one EU country to another. They will now be taxed in the same way as goods sold within individual Member States.

There are 4 fundamental principles or “cornerstones”, as the Commission refer to them, driving the changes:

  1. Tackling fraud: Businesses will now charge VAT on cross border trade. Currently this is exempt from VAT and is considered to be easily manipulated by companies who collect VAT and then disappear without paying the VAT collected to the relevant governments. 

  2. One Stop Shop: This will simplify the complexity of cross border compliance obligations for companies selling cross-border. VAT declarations and payments will be made using a single online portal in their home country using local rules, the local language and local returns. Member States will then pay the VAT to each other directly. This has been already implemented for e-services.

  3. Greater consistency:  The principle overriding the VAT on cross border goods will now be the destination principle. This means that VAT is charged at and paid to the Member State of the final consumer. This principle is already in place for sales of e-services.

  4. Less red tape: Invoicing rules will be simplified again to allow sellers to prepare invoices according to their local country rules even where they are involved in cross border trading. The obligation to prepare a list of cross border transactions for local tax authorities will also no longer be required.

Finally the proposal introduced the concept of a Certified Taxable Person; in essence a category of trusted business that will benefit from simpler and more time efficient 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

The proposal will be sent to Member States in the Council for agreement and then to the European Parliament for consultation. Technical amendments to the VAT Directive are expected sometime in 2018.