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The European Commission has proposed new rules to give Member States more flexibility to set Value Added Tax (VAT) rates and to create a better tax environment to help SMEs flourish.

These proposals are the final steps of the Commission's overhaul of VAT rules, with the creation of a single EU VAT area to dramatically reduce the €50 billion lost to VAT fraud each year in the EU, while supporting business and securing government revenues. 

The EU's common VAT rules, agreed by all Member States in 1992, are out of date and too restrictive. They allow Member States to apply reduced VAT rates to only a handful of sectors and products. At the same time, EU countries consider VAT rates as a useful instrument to pursue some of their political objectives. The Commission is now making good on its pledge to give Member States more autonomy on rates. Countries will be on a more equal footing when it comes to some existing exceptions to the rules, known as VAT derogations. 

The Commission is also addressing the problem of smaller companies suffering from disproportionate VAT compliance costs. Businesses trading cross-border face 11% higher compliance costs compared to those trading only domestically, with smaller players hit hardest. This is proving to be a real obstacle to growth, as small businesses make up 98% of companies in the EU. We are therefore proposing to allow more companies to enjoy the benefits of simpler VAT rules which are at the moment available to only the smallest firms. Overall VAT-related compliance costs will be cut by as much as 18% per year. 

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, said: "Three months ago the Commission proposed to overhaul the EU VAT rules moving towards a definitive VAT regime. It means introducing the principle of charging VAT at the country of destination. These proposals for VAT rates are scheduled to enter into force once the definitive regime is in place."  

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "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."

More flexibility

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. 

In addition to a standard VAT rate of minimum 15%, Member States would now 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%.

The new regime also means that all goods currently enjoying rates different from the standard rate can continue to do so. 

Reducing VAT costs for SMEs

Under current rules, Member States can exempt sales of small companies 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 players. This means that there is no level playing field for small companies trading within the EU.

While the current exemption thresholds would remain, these proposals would introduce:

• A €2 million revenue threshold across the EU, under which small businesses 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;
• A turnover threshold of €100,000 which would allow companies operating in more than one Member State to benefit from the VAT exemption.

These legislative proposals will now be submitted to the European Parliament and the European Economic and Social Committee for consultation and to the Council for adoption. The amendments will become effective only when the switch to the definitive regime effectively takes place.

Background

The proposed measures follow up on the 'cornerstones' for a new definitive single EU VAT area proposed in October 2017, and the VAT Action Plan towards a single EU VAT area presented in April 2016.

The common Value Added Tax (VAT) system plays an important role in Europe's Single Market. VAT is a major and growing source of revenue in the EU, raising over €1 trillion in 2015, which corresponds to 7% of EU GDP. One of the EU's own resources is also based on VAT.

For More Information

Q&A on VAT for small businesses and setting VAT rates

Action Plan on VAT – Towards a single EU VAT area