The review is not limited as to scope and range, but there are perhaps two key areas on which any such review would be focused. They are, so to speak, the Everest and Grand Canyon of the VAT landscape. One is determining in which state of the EU the VAT on a transaction falls payable and claimable, and the other is whether we need exemptions from the tax, and what might replace them.

 

This blog will discuss the aspect relating to the location of the tax charge, and I will return to exemptions in a later discussion. 

 

The history of this problem dates from the turn of the 1980s and 1990s when the Single Market was introduced in a manner which did not please the Commission. The Commission’s preferred idea was that sales of goods and services within the EU would be treated almost identically to sales within, say, the UK. VAT would be charged by the supplier, and then paid to the state to which the supplier belonged. The purchaser would claim this VAT in his VAT return, and thus from the state in which he belonged. They called this the “origin system”. It was simple idea. But the EU member states (which were then fewer in number) were concerned that net exporter states would collect the revenues and net importer states would lose them. 

 

So they discussed a mechanism for rectifying these imbalances (it is interesting, in fact, that they ever saw them as imbalances rather than the obvious outcomes of trade patterns, but they were unwilling to change the taxation impact of the old rules even if the procedures might be different). However such a mechanism would require record keeping that would have caused problems and removed some of the perceived benefit of the Single Market reforms. So it was decided, against the better instincts of the Commission, to replicate imports and exports by acquisitions and despatches. Under these rules, which we have to this day, the seller does not charge VAT, and the purchaser self accounts for VAT on goods and services received. The customs border has been removed, but we all pretend it was still there in how we account for the VAT flows. The country of consumption handles the VAT. This is called the Destination system. 

 

Nearly 20 years on, we still have this Destination system. The Commission would like us to reconsider the Origin system. The problem remains the same as before, but now with a vastly increased number of states in the Single Market. If it could not work in 1992 how can it work now?  That might be answered by reference to much more capable IT systems making the concept of redistributing the revenues between states more feasible, at least in theory; though the extreme problems with the automation of overseas business VAT reclaims which occurred in 2010 could put paid to that particular view.  In truth, the move to an origin based single market means a move to a single set of VAT rates across that market, to one agency for collecting VAT revenues, one law code under which it is all done, and then, a quasi governmental agency for distributing the net revenues down to each member state in accordance with a politically agreed principle. Anything other than that would be ramshackle. So, what would be the benefits?

 

The benefit of simplicity for businesses is attractive. It would also exert significant pressure against VAT fraud (though some would say that this would simply send the fraudsters off looking for other vehicles for fraud thus achieving little in the wider scheme of things). It would eliminate the aspects of interpretation from country to country that lead in some marginal cases both to double taxation and to non-taxation. It would eliminate cross border shopping. So, what would be the disadvantage?

 

Well, that obviously is the loss of each state’s control over the most important taxation tool available to them. It would be a giant stride in the direction of a super state. Do the member states’ populations want that? The answer appears clearly to be “No”. So it seems to me that there is very little prospect of significant change in this area.

 

Soon I will comment on the subject of exemptions from VAT