The European Commission has recently issued a legislative proposal for changes in the current VAT regime that will be submitted to the European Parliament and European Economic and Social Committee for consultation and the Council for adoption. The proposed changes aim to a simpler, more flexible and more attractive to small companies, tax environment and towards the creation of a single EU VAT area.

Changes to VAT system submitted to European Parliament

The proposed VAT system is based on general rules in contrast to a system of exceptions that is implemented at present.

The new rules provide for a standard VAT rate of minimum 15% while giving the flexibility to Member States 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.

In addition, the present complex list of goods and services to which reduced rates can be applied would be replaced by a list of products to which reduced VAT rates cannot be applied. Among others the new list would contain weapons, alcoholic beverages, tobacco, gambling,  smartphones and fuel.

In relation to SMEs, the proposed rules would provide for:

  • A €2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures in terms of VAT registration, VAT record keeping and filling of VAT returns, whether or not they have already been exempted form VAT,
  • the possibility for Member States to free all small businesses that qualify for a VAT exemption form obligations relating to registration, invoicing, accounting or returns,
  • A turnover threshold of €100.000 which would allow companies operating in more than on Member States to benefit from the VAT exemption.

In addition, the exemption from VAT which till now has been available only to domestic players will apply to businesses with cross boarder activity as well under the requirement that the turnover in Country of consumption is below the national threshold in that Country and that the annual turnover in the EU is below € 100,000.

The proposed measures are expected to reduce cross-border VAT fraud by around 80% and the overall VAT compliance costs by up to 18% per year.