EU set to overhaul SME VAT scheme to simplify rules

The EU has launched a trio of VAT consultations including proposals to simplify the SME VAT scheme for small businesses, attempts to harmonise EU VAT rates and measures to improve intra-EU transactions

As part of the Action Plan on VAT to create a single European VAT area for cross-border supplies, the European Commission is consulting on reform of VAT rates to amend Directive 2006/112/EC. The desire to create a unified VAT landscape requires reform of the existing special rules for SMEs and modernisation of existing EU VAT rules.

The major change could be an overhaul of the current SME Scheme, which controls VAT compliance for smaller companies.

The consultation, Adapting the VAT system to the needs of SMEs, proposes a comprehensive simplification package for SMEs that will seek to create a more business-friendly environment, as set out in its 2016 Action Plan on VAT (COM(2016) 148 final).

Interested parties are asked to complete an online survey voicing their views and concerns, including use of the SME exemption, how the current system interacts with business practice, problems with lack of consistency across the EU as different countries pursue their own systems, and whether it prevents businesses trading cross-border in EU.

It is gauging views on making the SME scheme mandatory for all member states and all SME companies, rather than the current optional basis.

One of the more interesting proposals being considered is to allow companies based in another member state to sign up to the SME scheme in another jurisdiction where they trade but are not based.

Problems also arise at the moment if company turnover fluctuates as companies automatically have to apply the normal VAT rules. Again this is up for review.

The current VAT legislation contains specific measures designed to alleviate the effects of small enterprises having to deal with VAT.

Under the SME scheme, member states are allowed to exempt supplies of goods or services by SMEs with an annual turnover not exceeding a given threshold, or to apply simplified procedures to SMEs for charging and collecting VAT. Member states may also release SMEs covered by this scheme from some or all of their VAT compliance obligations.

The reason for the overhaul is that ‘the present rules suffer from several drawbacks. Those rules still make it excessively complex and costly for SMEs to comply with their VAT obligations and do also not take into account the Single Market perspective, since suppliers from other member states do not get the same VAT treatment as domestic suppliers. As a result of this, SMEs bear proportionally higher VAT compliance costs than large enterprises’, the Commission stated in the consultation document.

The SME scheme consultation questionnaire is available here. The document is also available as a PDF.

The European Commission Public consultation on the special scheme for small enterprises under the VAT Directive is available here

B2B intra-EU transactions on goods

The consultation on B2B intra-EU transactions on goods focuses on simplifying the complex and fragmented VAT rules which currently apply.

It is seeking views on the current VAT situation of B2B intra-EU supplies of goods, possible short term improvements of the current transitional VAT system and the need to move towards a definitive VAT system based on the principle of taxation of the supply in the member state of destination.

The consultation on Definitive VAT system for B2B intra-EU transactions on goods is available here

Reform of EU VAT rates

The third consultation focuses on reform of VAT rates, with proposals to look at closer convergence of cross-border VAT rates. It asks for feedback on creating a proper balance between harmonisation and member states’ autonomy in setting VAT rates, problems and risks linked to differentiation of VAT rates within the single market.

Once the new VAT directive is adopted, current derogated or exempted VAT rates are likely to remain although the system has become fragmented and this means that the EU is further away from a harmonised VAT regime. However, the move to destination VAT approach means that it is no longer beneficial for companies to locate in a lower VAT jurisdiction to sell cross-border.

The Commission stated in the consultation documentation: ‘As a consequence of these developments, the Commission adopted an Action Plan on VAT in which it presented its plan to update rules on VAT rates to give more discretion to member states in setting their VAT rates.

‘Following the abandonment of the origin system, this reform would take the subsidiarity principle laid down in article 113 TFEU into account, which provides that the EU can act only if and in so far as certain objectives cannot be sufficiently achieved by the member states and can be better achieved at Union level.’

The Public consultation on the reform of EU VAT rates is available here

The questionnaire on reform of EU VAT rates is available here

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