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Major changes to VAT

13th April 2016

On 7 April, the European Commission published an Action Plan setting out proposals for major changes to the way VAT will apply on cross border transactions. It is intended that these changes will be put to the Council of Ministers in 2017, and if adopted they will be implemented in subsequent years.

The changes cover a number of areas as follows.

Sale of goods

At present, when goods are sold cross border there is a distinction between B2B and B2C transactions. For B2B transactions the supplier will zero-rate their sale of goods, and the business purchasing them accounts for VAT in their own Member State.

For B2C transactions the seller charges domestic VAT up to a certain “Distance Selling” threshold, and once that threshold is exceeded, they are then obliged to register for VAT in the various Member States into which they have sold goods.

What the Commission is now proposing is that the seller should charge VAT at the rate applicable in the customers country and declare and pay this to their own Revenue Authority, i.e. HMRC in the UK who would then act as a clearing house and remit the VAT collected to the Member States who have purchased the goods.

This is an extension to the provisions that currently apply to certain services, such as the sale of electronically supplied services where VAT is declared to HMRC through what is known as the Mini One Stop Shop (MOSS).

This will clearly have a major impact on things such as e-commerce and the sale of goods via websites, which is specifically referenced as being the area where these changes will initially apply, but in due course they envisage it applying to all cross border sales. 

Sale of services

The document indicates that in due course cross border sales of all services will be treated in this way. 
At present the general rule for B2B supplies of services deems them to be supplied where the customer belongs, so a UK supplier would not charge VAT and the customer would account for VAT using a reverse charge mechanism similar to the procedure for goods.

There are exceptions to this, e.g. land transactions are taxed where the land is situated, and other services are regarded as being supplied where the work is performed.

For B2C transactions, the general rule is that they are deemed to be supplied where the supplier belongs, so a UK supplier providing services to a French customer would charge UK VAT.

The rules setting out the place of supply have only just been altered starting in 2010 and culminating in January 2015. The document is light on detail, but the reference to all cross border transactions of goods and services being treated in the same way does seem to indicate that there will be further changes.

As mentioned above, certain B2C services are already regarded as being supplied in the Member State of purchase, and the supplier has the option of either physically registering for VAT in their customer’s country or of submitting VAT declarations through the MOSS system.

One of the biggest complaints about MOSS was the absence of any registration threshold or de minimis limit, meaning that a business could have an obligation to submit a MOSS return for only 1 Euro’s worth of VAT. There is a reference to introducing an EU wide threshold which one would hope would be retrospectively applied to services, but no further details are available at this stage.

During the transition to this definitive VAT system certain “trustworthy” businesses certified as such by their own tax authority will still be able to continue using the current system, but the document does not say over how long a period it envisages the changes taking place.

Low Value Consignment Relief

At present there is a relief from VAT on the importation of goods where the value of the import is below a certain limit. 

This was tightened up a few years ago in the UK because of businesses fulfilling orders for item such as DVDs, CDs and greetings cards from the Channel Islands. The document proposes the complete abolition of low value consignment relief.  

Reduced and Zero-rates

The plan does not propose the abolition of any existing reduced or zero-rates, but does propose a change to the system and sets out two options.

Option one envisages the minimum standard-rate of 15% being maintained, but the list of reduced rates would be reviewed at regular intervals. The Commission would however, analyse whether any changes created a distortion of competition or posed any risk to the functioning of the single market, and it seems implicit from this comment that they could effectively veto any change.

The second option is the abolition of the list of things which can be subject to a reduced-rate and to allow Member States to decide what things they wish to subject to a reduced-rate. This would however, be subject to a number of rules to avoid unfair tax competition, and the total number of reduced-rates could be limited. 

Under this option the minimum standard-rate of VAT of 15% would be removed, and any reduced-rate available in one Member State would be available to all. This could for instance mean that the UK zero-rate on food would be available throughout the EU, but the French reduced-rate on supplies of catering could be available in the UK.

Digital publications

The report specifically refers to harmonising the treatment of digital publications with hard copy ones, so it will be interesting to see whether this means the Government will extend the zero-rate to digitised publications, or whether it will “level up” by abolishing the zero-rate for printed matter and subjecting all publications to a reduced-rate.

Enhanced cooperation

The document recognises the need for enhanced cooperation between Member States, and proposes an extension to the information available to Eurofisc. This is a network of civil servants set up to exchange targeted information on VAT fraud, and what seems to be envisaged is that they will have direct access to information held by other tax authorities.

There is also a proposal to create a European Public Prosecutor’s Office to tackle VAT fraud. 

Next steps

It appears that the proposed extension of the One Stop Shop to all forms of e-commerce and the changes to digitised publications are likely be implemented first with proposals in 2016.

The wider changes are likely to be proposed in 2017, and certain enhanced cooperation measures are also likely to commence this year with automatic exchange of information for Eurofisc being proposed in 2017.

At present this is just an Action Plan, and is subject to agreement by the Council of Ministers (Heads of State) of all EU countries. Agreement seems likely, and even if the UK votes for BREXIT in June these measures would still impact the UK as non EU countries already have to apply a One Stop Shop approach or register in other EU countries, and so it is inconceivable that any new trade agreements could be reached which did not require us to comply with these proposals to the extent they involve trade with the EU.

For further advice or assistance please contact our VAT team. 

Phil Salmon

VAT Partner
Tel: +44 20 7969 5611