The reforms, announced on Wednesday by EU Commissioner Pierre Moscovici, are designed to improve and modernise the VAT system for governments and businesses and to reduce by 80 per cent the €50 billion lost each year to cross-border VAT fraud.
The Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.
The Commission will seek agreement on four fundamental principles, or 'cornerstones' of a new definitive single EU VAT area:
- Tackling fraud: VAT will now 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').
‘These are radical proposals from the EU to amend the VAT Directive. But for the UK, the elephant in the room is what this may or may not mean for UK businesses trading with EU member states post 1 April 2019.
‘These new proposed VAT reforms may now need to be considered as part of the UK negotiation on transitional arrangements to retain access to the tariff-free single market.
‘This announcement could make an already difficult Brexit negotiating process even more complex.’
This legislative proposal will be sent to the EU 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 so that the definitive VAT regime can be implemented.