European Commission
At a meeting of EU Finance Ministers last month, agreement was reached to update the current rules governing VAT rates for goods and services. The European Commission had initially proposed reform of VAT rates in 2018 with the objective of aligning the rules with the EU's common policy priorities. The reforms seek to do this by:
- Updating the list of goods and services to which all Member States can apply reduced VAT rates. New products and services added to the list include those that protect public health, items such as green heating systems and solar panels which support the climate change goals and certain digital services that previously did not qualify for reduced rates such as internet access and livestreaming of cultural and sports events. Member States will for the first time also be able to zero-rate (or apply a rate lower than 5%) on certain listed goods and services considered to cover basic needs such as foodstuffs, medicines and pharmaceutical products.
- Requiring the removal by 2030 of reduced rates for goods and services (such as fossil fuels) deemed out of step with the EU’s climate charge objectives.
- Making derogations and exemptions for specific goods and services, currently in place for historical reasons in certain Member States, available to all countries to ensure equal treatment and avoid the patchwork of rates which can lead to distortions of competition. Existing derogations that are not justified by public policy objectives will need to end by 2032 (and derogations which are inconsistent with the EU’s Green Deal will have to end by 2030).
Member states will continue to have to apply a minimum rate of VAT of 15%.
The Council of the EU awaits the European Parliament’s opinion on the proposal to formerly adopt the new directive by March 2022. The Member States shall apply those measures from 1 January 2025.
The updated rules will now be sent to the European Parliament for its consultation on the final text by March 2022. Once formally adopted by Member States, the legislation will come into force 20 days after its publication in the Official Journal of the European Union, allowing Member States to apply the new system as of that date.
DLA Piper comment:
The updated rules on VAT rates provide for greater flexibility and autonomy for Member States in determining VAT rates in their respective territories. The change makes it possible to apply up to five different VAT rates, including a zero rate, per Member State. Therefore, the changes end the necessity for a large number of temporary derogations and concessions regarding the application of reduced VAT rates. Member States are currently applying approximately 250 different VAT rates in the EU, including zero rates in certain cases. The updated rules are also part of a step towards a unified VAT regime to conclude the Single Market. The European Commission estimates that a unified VAT regime would reduce cross-border VAT fraud by 41 billion Euros and compliance cost for businesses by 1 billion Euros. However, the freedom that is intended to be given to the Member States to determine VAT rates seems to run against a supposed EU tax harmonisation. Suppliers do not gain any significant benefit from being established in a Member State with lower VAT rates. In practice, the changes mean an additional complication for businesses as far as they will still have to take into account a large number of different VAT rates. It will be interesting to see if the UK follow suit in any respect, post Brexit.
See: Council reaches agreement on updated rules for VAT rates
See: Questions and Answers: Agreement on new rules governing VAT rates
