EU sets out draft rules to amend VAT Directive to cut €50bn fraud

The European Commission has issued the detailed technical amendments to overhaul the EU rules on VAT to cut down on fraud across the 28 member states, effective from 2021, which will affect business to business VAT compliance

VAT fraud costs the EU an estimated €50bn (£43.5bn) in evaded taxes a year across the EU, representing a significant percentage of the total €1 trillion plus raised in VAT in 2015, equivalent to 7% of EU GDP.

Changes to the long standing VAT Directive are expected to recoup an estimated €40bn a year in lost VAT revenue, slashing VAT evasion by up to 80%, the Commission expects, through better cross-border collaboration on VAT collection.

It is also likely to reduce compliance costs for businesses by €938m a year.

Due to come into force across member states from 1 January 2021, the draft legislation substantially amends the rules relating to VAT and ends the current 'transitional' VAT regime in the single market, with the rules set to come into force post-Brexit but during the transition period.

While the UK remains a full member of the EU, with all the rights and obligations of EU membership in force, the government will continue to negotiate, implement and apply EU legislation.  The European Commission’s EU VAT Digital Single Market proposals are due to come into effect from 1 January 2021 and take an approach that the UK very much supports. The Commission is currently working on the detailed implementation rules, and the UK continues to play an active part in that process.

An HMRC spokesperson told Accountancy: ‘Following the UK’s exit from the EU, the government aims to keep VAT processes as close as possible to what they are now, providing the best continuity and certainty for businesses and individuals. The Taxation (Cross-Border Trade) Bill allows us to pursue this aim.

‘Of course, the final arrangements will depend on the negotiations with the EU.’

It will see significant amendments to the VAT Directive, with nearly half the original Directive updated to reflect the new approach. This follows a consultation period  in autumn 2017.

Last October, the Commission proposed the main principles for the creation of a single EU VAT area although it stopped short of introducing a standardised VAT system across member states, focusing more on processes and fraud prevention.

The main thrust of the amendments to the VAT Directive 2006, detailed in a 56-page document, includes plans to simplify how goods are taxed, a single online portal – one stop shop – for traders, reduced administrative costs and seller responsibility for VAT collection.

Simplifying how goods are taxed

In the current VAT system, trade in goods between businesses is split into two transactions: a VAT-exempt sale in the member state of origin and a taxed acquisition in the member state of destination.

The major change proposed will end the artificial split of a single commercial transaction. Once agreed, the amendments contained in the VAT rules will define the cross-border trade of goods as a 'single taxable supply' which will ensure that goods are taxed in the member state where the transport of the goods ends.

This should help to curb abuse of the system through carousel fraud, whereby traders move goods between EU member states claiming multiple VAT refunds without paying required VAT charges.

Single online portal (one-stop shop) for traders

An online portal or one-stop shop for all business-to-business (B2B) EU traders will be set up for VAT compliance.

This system will also be available to companies outside the EU who want to sell to other businesses within the EU and who would otherwise have to register for VAT in every member state. Once in force, these businesses will have to appoint one intermediary in the EU to take care of VAT compliance.

Specific reporting obligations linked to the transitional VAT regime will no longer be needed for trade in goods. Invoicing related to EU trade will be governed by the rules of the member state of the seller.

Seller responsibility for VAT collection

The seller should charge the VAT due on any sale of goods to customers in another EU country, at the rate of the member state of destination. Only where the customer is a Certified Taxable Person (ie, a reliable taxpayer, recognised as such by the tax administration) will the acquirer of the goods be liable for VAT.

The draft proposals set out the principle that taxation at destination is applied as widely as possible, and that the definition of intra-EU supply of goods should include, without any restriction by way of a threshold, a supply to a non-taxable legal person, a supply to an exempt taxable person, a supply to a taxable person under the special scheme for small enterprises and a supply to a farmer under the flat-rate scheme.

Pierre Moscovici, Commissioner for economic and financial affairs, taxation and customs, said: ‘The proposals represent the final building blocks in the overhaul of the EU's VAT system. They will open the way to simpler rules, less red tape and a more user-friendly system, thanks to the online one-stop shop for traders. It is time for member states to trust each other when it comes to VAT collection on intra-EU transactions.

‘Our proposed reform could reduce by 80% the €50bn lost each year in cross-border VAT fraud.’

This Directive is subject to approval by the European Parliament and will enter into force on the 20th day following publication in the Official Journal of the European Union.

Although the UK is unlikely to sign up to the amended VAT Directive as the final Brexit agreement and transition period will be completed by March 2021, the government does support the principles behind the rule changes and they are likely to be adopted in some form in the UK.

The Taxation (Cross-Border Trade) Bill provides the ability to pursue this aim and caters for a range of negotiation outcomes. The work that sits behind the Bill on associated systems and processes is taking place. The Bill has passed through the Committee Stage in the House of Commons and will next be considered at Report Stage and Third Reading in the Commons.

The Customs Bill White Paper sets out plans to legislate for the standalone customs, VAT and excise regimes the UK will need once it leaves the EU.

The final arrangements for any future VAT policies, processes and systems will depend on the final outcomes of negotiations with the EU.

Until the UK leaves the EU, the UK is bound by the EU VAT system. The UK and EU negotiating teams have reached agreement on the terms of an implementation period that will start on 30 March 2019 and last until 31 December 2020. To give businesses and citizens certainty, common rules will remain in place until the end of the period meaning businesses will be able to trade on the same terms as now up until the end of 2020.

Report by Sara White

Draft Council Directive amending Directive 2006/112/EU – VAT directive issued 25 May 2018

European Commission Action Plan on VAT – general overview

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