European Commission sets action plan for VAT simplification

The European Commission has set out a proposed action plan to modernise the EU VAT system in a move which should give more freedom to the member states

The action plan will include new rules such as the implementation of key principles for a future single European VAT system, short term measures to tackle VAT fraud, an updated framework for VAT rates and greater flexibility for member states to set them in addition to plans to simplify rules for e-commerce.

Under the new plan, member states could see the current minimum standard rate of 15% being scrapped.

The Commission said the action plan aims to tackle fraud, support business and support the digital economy.

This follows estimates that €50bn (£40.35bn) is lost in cross-border fraud every year, while the current VAT system creates “significant administrative burdens” for SMEs and online businesses.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, said, “We face a staggering fiscal gap: the VAT revenues collected are €170bn short of what they should be.

“This is a huge waste of money that could be invested on growth and jobs. It’s time to have this money back.”

The Commission proposed two different options to modernise the framework for rates. The first one would maintain the minimum standard rate of 15% and review regularly the list of goods and services that benefit from reduced rates.

The second option, which the Commission described as “the most ambitious”, would be to abolish the 15% rate.

“While member states would remain constrained by EU legislation, such as single market or competition rules, and the EU’s economic governance framework, this option would require safeguards to be put in place to avoid unfair tax competition within the single market, while also guaranteeing legal certainty and reducing compliance costs,” the Commission warned.

Under both options, the zero and reduced rates would be maintained.

If the second option comes into effect, the UK government could eventually abolish VAT on sanitary products, following pressure to scrap the so-called “tampon tax”.

However, the EU referendum “Leave” campaign said women will still be paying the tampon tax after the vote takes place.

Anne Marie-Trevelyan, a Conservative MP, said, “Despite a pledge to scrap the tampon tax, women will still be charged VAT on sanitary products, and any attempt by the UK government to zero-rate them could be vetoed by any of the 27 other member states even after the referendum.”

The action plan also includes a legislative proposal to modernise and simplify VAT for cross-border e-commerce, meaning e-books would benefit from the same rates as physical publications. The Commission hopes this will be implemented by the end of the year.

Moreover, it is also proposing the implementation of a VAT simplification package for SMEs to trade across borders by 2017.

Later this year, the Commission will propose measures to strengthen current tools used by member states to exchange information related to VAT fraud, fraud schemes and good practices.

Furthermore, the new rules would mean cross-border transactions would continue to be taxed at the rates of the destination country, but the way taxes are collected would be gradually changed towards a more fraud-proof system.

At the same time, the EU proposes the implementation of a web portal that would provide a simple VAT collection system for businesses.

The Commission said the next step will be to ask the European Parliament to provide political guidance and support on the options the action plan has proposed. The proposals need the support of all 28 member states.