European Commission proposals for reduced VAT rates

Thu 01 Feb 2018

The European Commission (EC) has announced proposed new rules to give Member States more flexibility to set VAT rates and reduce the compliance burden on SMEs.  The proposals summarised below will be submitted to the European Parliament and the European Economic and Social Committee for consultation and to the Council for adoption. If adopted the amendments would become effective only when the switch to the definitive regime effectively took place.

The cliff edge effect of the UK VAT registration threshold and simplification of VAT administration have recently been considered by the Office of Tax Simplification. The Government indicated on 22 November that it would keep the registration threshold at £85,000 for a two year period while it consulted on possible changes.  It will be interesting to see how the UK consultation takes account of the EC proposals.

Flexibility on VAT rates

Member States can currently apply a reduced rate of as low as 5% to two distinct categories of products in their country. A number of Member States also apply specific derogations for further reduced rates.  Under the EC proposals, in addition to a standard VAT rate of minimum 15%, Member States would be able to put in place:

• two separate reduced rates of between 5% and the standard rate chosen by the Member State;

• one exemption from VAT (or ‘zero rate’);

• one reduced rate set at between 0% and the reduced rates.

The current, complex list of goods and services to which reduced rates can be applied would be abolished and replaced by a new list of products (such as weapons, alcoholic beverages, gambling and tobacco) to which the standard rate of 15% or above would always be applied.

To safeguard public revenues, Member States will also have to ensure that the weighted average VAT rate is at least 12%.

Reducing VAT costs for SMEs

Under current rules, Member States can exempt small companies’- sales from VAT provided they do not exceed a given annual turnover, which varies from one country to the next. Growing SMEs lose their access to simplification measures once the exemption threshold has been exceeded. Also, these exemptions are available only to domestic businesses. This means that there is no level playing field for small companies trading within the EU. While the current exemption thresholds would remain, the EC proposals would introduce:

• a €2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures, whether or not they had 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;

• a turnover threshold of €100,000 which would allow companies operating in more than one Member State to benefit from the VAT exemption.

To discuss the VAT implications of doing cross border business, Brexit and EU developments, please get in touch a member of the Mazars VAT team.