Proposals for the future of EU VAT
Part 1 of this series of articles covered the current situation when selling to private customers (B2C) in another EU country. VAT is charged to the customer at the rate current in the UK but this is subject to the distance selling rules. Once the level of sales has been reached when this rule comes into play, the seller has to charge VAT at the rate in force in the country of the customer and register for VAT in each country to which the distance selling applies.
Part 1 also looked at the situation where digital services were sold, thus requiring all business to register and report VAT under the VAT MOSS rules, charging VAT at the rate in force in the country of the customer but reporting and paying the relevant VAT in the country of origin. The plan is to extend this concept to the sale of all items to non-VAT registered persons through an extension of MOSS called OSS (One Stop Shop).
Part 2 looked at the same situation but when selling business to business (B2B). This currently involves the ‘swapping’ of VAT numbers and the invoices being labelled as an EU sale (with no VAT being charged) or a Reverse Charge. Currently the same system is applied regardless of whether the goods/services are sold online or not.
The two scenarios are dealt with in a very different way and un-scrupulous business will try to avoid the payment of VAT by working around the rules.
Part 3 looks at the proposals being considered by the EU VAT office to simplify the entire system into a single VAT reporting mechanism and also reduce the likelihood of businesses fraudulently underpaying the VAT due in the relevant country.
The problem of VAT fraud
The current system for dealing with EU transactions across different EU borders is considered to lack equivalent controls and therefore has the ability to be the root of cross-border fraud. Such fraud occurs when, for example, a supplier pretends to have transported the goods to another Member State (thus a B2B sale with no VAT being charged) but the goods in fact remain in the original company and are consumed VAT-free locally. Fraud also occurs if a client of a cross-border transaction purchases goods or services VAT-free and charges VAT without remitting it to tax authorities while his/her customer can deduct it.
EU VAT consultation
The following sections (in italics) have been taken from ‘An action plan on VAT - Towards a single EU VAT area - Time to decide’ published in 2016.
The VAT system has been unable to keep pace with the challenges of today's global, digital and mobile economy. The current VAT system, which was intended to be a transitional system, is fragmented, complex for the growing number of businesses operating cross-border and leaves the door open to fraud: domestic and cross-border transactions are treated differently and goods or services can be bought free of VAT within the single market
It now urgently needs reform:
- It needs to be simpler for businesses to use. Compliance costs are significantly higher in single market trade than in domestic trade , while complexity is stifling business, especially small and medium-sized businesses (SMEs);
- It must combat the growing risk of fraud. The "VAT gap" between expected revenue and revenue actually collected is estimated at EUR 170 billion , while cross-border fraud alone accounts for EUR 50 billion of revenue loss each year;
- It needs to be more efficient, in particular at exploiting the opportunities of digital technology and reducing the costs of revenue collection;
- It must be based on greater trust: trust between business and tax administrations, and between EU tax administrations.
Following the consultation process, on 4 October 2017 the EU VAT office issued its planned proposals and these are summarised below.
Long term the EU is considering amending the cross-border VAT system to set up a Single EU VAT area which will enable the two separate and distinct systems (B2C and B2B) to be more closely linked regardless of whether the transaction is for a sale, an acquisition or a reverse charge.
It is important to note that the setting up of a single EU VAT Area does not mean that each country will operate the same VAT Rate. The current minimum level allowed by EU legislation is 15% with some goods being charged at a reduced rate of 5% and with zero rated and exempt items. The proposal is to leave the minimum rate of VAT at 15% and to look at the areas for which reduced and zero rate are allowed but to still allow individual countries to set their own rates domestically.
There are two main proposals – long term proposals and short term ‘fixes’.
The long term proposals contain several fundamental principles or cornerstones for a definitive VAT regime.
- The principle of taxation at destination for intra-EU cross-border supplies of goods. Under this principle the VAT rate of the Member State of destination, the Member State where the buyer is located, is charged.
- The confirmation that the vendor is liable in the case of an intra-EU supply of goods as a general rule, which means that the vendor is responsible for charging and collecting the VAT.
- The One Stop Shop (OSS) will be extended. Businesses will be able to make declarations, payments and deductions for cross-border supplies of goods through a single online portal, as is already the case for the supply of e-services (MOSS).
This means that the current system of selling goods online to EU VAT-registered customers, which is exempt for VAT in the country of origin, will cease and VAT will be charged on all sales, at the rate in force in the country of destination. The VAT must be actually paid to the vendor. The vendor will then pass on the collected VAT to their own domestic revenue department via the OSS system.
The buyer should then be able to reclaim this as input VAT where applicable on their own local VAT return.
The short term fixes include:
- Simplification of VAT rules for companies moving goods from one Member State to another Member State where they are to be stored before being supplied to a customer known in advance. The described situation is referred to as "call-off stock arrangements". This simplification is limited only to certified taxable persons – a concept which is explained below
- Simplification provided for chain transaction situations identifying the supply with which the intra-Community transport of goods should be linked. This simplification is limited only to certified taxable persons
- Simplification of the proof of transport of goods between two Member States needed for the application of the exemption to intra-Community supplies. This simplification is limited only to certified taxable persons
- Clarification that, in addition to the proof of transport, the VAT number of the commercial partners recorded in the electronic EU VAT-number verification system (VIES) is required in order to apply the cross-border VAT exemption under the current rules
A New Concept: "Certified Taxable Person"
A business can apply to its national tax authority and become a Certified Taxable Person (CTP) by proving compliance with pre-defined criteria such as:
- regular payment of taxes
- internal controls
- proof of solvency
Once certified, the company will be considered a reliable tax-payer.
Both the CTP and the companies that do business with it will enjoy a number of simplified procedures for the declaration and payment of cross-border VAT.
The status of Certified Taxable Person will be mutually recognised by all EU Member States.
The following is a summary of some of the proposals intended to simply cross-border VAT within the EU
- The EU is proposing some interim improvements to the supply of EU cross-border supplies to enable the possibilities for VAT fraud to be reduced
- A standard system for both Business to Business (B2B) transactions and Business to Consumer (B2C) transactions will be introduced so that all EU sales will be issued with VAT being charged at the rate in place in the country where the customer resides and all such VAT will be reported via the OSS.
The proposals will be forwarded to the European Parliament and the European Economic and Social Committee for consultation, and to the Council for their agreement. They will require unanimous agreement from all Member States in the Council before they can enter into force.
The next planned steps are…
- Proposal for a modernised system of setting VAT rates, giving greater flexibility to Member States as regards VAT rates.
- Proposal to reinforce administrative cooperation between Member States, enabling Member States to share information more quickly and to cooperate more.
- Proposal to simplify VAT for SMEs by updating special VAT rules for smaller companies.
- Full technical adaptation of the VAT directive to reflect the changes needed to practically implement the VAT definitive regime as proposed by the Commission.
- Entry into force of the Single EU VAT area, once agreed.
There is a helpful fact sheet that explains the proposals which can down be downloaded via the link:
Where does this leave our members?
Obviously with Brexit, it is not yet known what affect this will have on how the UK deals with transactions with EU countries for VAT purposes.
As the new rules will apply to countries both within and outside the EU, UK businesses will still be affected and so will need to understand the current developments that are being proposed to simplify the system of charging VAT on both B2C and B2B supplies.
As soon as ICB has a further update we will issue some additional guidance although it should be noted that on 9 October 2017 the Government issued a White Paper on its own proposals for the future of Customs and VAT post Brexit.
Head of Technical Policy