Chapter News

More flexibility on VAT rates for Member States

The Commission proposes new rules to give Member States more flexibility to set VAT rates and to create a better tax environment to help SMEs flourish

The EU’s common VAT rules, agreed by all Member States in 1992, are out of date and too restrictive.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.

This is the reason why the European Commission has today proposed new rules to give Member States more flexibility to set Value Added Tax rates and to create a better tax environment to help SMEs flourish.

Today’s 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 aims of today’s proposals are twofold: to meet demands from Member States to have more flexibility to set rates and to extend VAT exemptions that exist for domestic companies to small companies trading cross-border.

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. The Commission proposed 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.

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.

Compliments of the European Commission