The fundamental changes will see a new VAT system taxing sales of goods from one EU country to another in the same way as goods are sold within individual member states.

The Commission says around a third (€50bn) of the VAT which is not collect is due to cross-border fraud, and says its proposals would reduce this sum by 80%. They would also reduce compliance costs for companies by an estimated €1bn.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, said: ‘Twenty-five years after the creation of the single market, companies and consumers still face 28 different VAT regimes when operating cross-border.

‘Criminals and possibly terrorists have been exploiting these loopholes for too long, organising a €50bn fraud per year. This anachronistic system based on national borders must end!

‘Member states should consider cross-border VAT transactions as domestic operations in our internal market by 2022.’

There are four fundamental principles, or 'cornerstones' of the proposed new definitive single EU VAT area.

Firstly, VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is exempt from VAT, which the Commission says provides an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.

Secondly, it will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a 'one stop shop'.

Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member states will then pay the VAT to each other directly, as is already the case for all sales of e-services.

There will also be a move to the principle of 'destination' whereby the final amount of VAT is always paid to the member state of the final consumer and charged at the rate of that member state. This ‘destination’ based approach is already in place for sales of e-services.

Finally, invoicing rules will be simplified, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called 'recapitulative statement').

In addition, the proposal introduces the notion of a ‘certified taxable person’ – a category of trusted business that will benefit from much simpler and time-saving rules. There will be four 'quick fixes' to come into force by 2019. The Commission says these short-term measures were explicitly requested by member states to improve the day-to-day functioning of the current VAT system until the definitive regime has been fully agreed and implemented.

They are: the simplification and harmonisation of rules regarding call-off stock arrangements;  recognition of the VAT identification number of the customer as a substantive condition in order to exempt from VAT an intra-community supply of goods; simplification of rules in order to ensure legal certainty regarding chain transactions; and the harmonisation and simplification of rules on the proof of the intra-community transport of the goods in order to exempt from VAT an intra-community supply of goods.

The Commission’s legislative proposal will now be sent to the member states in the Council for agreement and to the European Parliament for consultation. The Commission will follow this initiative in 2018 with a detailed legal proposal to amend the existing VAT directive at technical level so that the definitive VAT regime can be implemented.

VAT is a major and growing source of revenue in the EU, raising over €1 trillion in 2015, corresponding to 7% of EU GDP.

The Commission’s communication, Towards a single EU VAT area - Time to act, is here.

Report by Pat Sweet