European Commission proposes reform of EU VAT system

Oct 09, 2017

The European Commission recently launched plans for what it describes as the biggest reform of EU VAT rules in a quarter of a century.  The proposed VAT reform will counter VAT fraud while also modernising the VAT system making it easier for companies and businesses.

The Commission’s reform plans focus on four fundamental principles, or 'cornerstones' of a new definitive single EU VAT area:

  • Tackling fraud: VAT will 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').

The Commission’s 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.

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 VAT Directive.