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EU To Ease VAT Rules On Rates, SMEs

by Ulrika Lomas, Tax-News.com, Brussels

19 January 2018


The EU has unveiled plans to give member states greater power to vary VAT rates and to relax VAT rules for small businesses.

The proposals are part of a broader overhaul of the EU's VAT system, which aims at the creation of a single VAT area. The EU's common VAT rules were agreed in 1992. According to the European Commission, the rules are out of date and too restrictive.

Tax Commissioner Pierre Moscovici said: "Today we are taking another step towards creating a single VAT area for Europe, with simpler rules for our member states and companies. 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."

Under the current rules, EU member states can apply a reduced rate of as low as five percent to two distinct categories of products in their countries. A number of member states also apply specific derogations for further reduced rates.

The Commission has proposed that, in addition to a standard VAT rate of a minimum 15 percent, member states should be able to put in place:

  • two separate reduced rates of between five percent and the standard rate chosen by the member states;
  • one exemption from VAT (or "zero rate"); and
  • one reduced rate set at between zero percent and the reduced rates.

The current list of goods and services to which reduced rates can be applied would be abolished. It would be replaced by a new list of products to which the standard rate of 15 percent or above would always be applied.

To safeguard revenues, member states would be required to ensure that the weighted average VAT rate is at least 12 percent.

The second prong of the proposals focuses on SMEs. EU member states are currently permitted to exempt sales of small companies from VAT, provided that they do not exceed a given annual turnover. The turnover threshold varies from member state to member state.

The Commission said that although the current exemption thresholds would remain in place, it would introduce:

  • A EUR2m (EUR2.5m) revenue threshold across the EU, under which SMEs 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; and
  • A turnover threshold of EUR100,000, which would allow companies to operating in more than one member state to benefit from the VAT exemption.

The Commission said that businesses trading cross-border face 11 percent higher compliance costs to those trading only domestically. It estimates that overall VAT-related compliance costs will be cut by as much as 18 percent per year as a result of the changes.

The Commission's proposals will now be submitted to the European Parliament and the European Economic and Social Committee for consultation, and then to the European Council for adoption.

The amendments would become effective only when the switch to the definitive regime effectively takes place.

TAGS: compliance | VAT rates | VAT special schemes | tax | small business | business | European Commission | value added tax (VAT) | VAT legislation | VAT cross-border transactions | accounting | legislation | services | VAT compliance matters | Europe

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