On 18 January 2018, the European Commission issued proposals for reduced rates of VAT within the European Union and a special VAT regime for SMEs. The proposals aim to reduce the level of VAT fraud across the European Union, update the rules applicable to VAT to reflect modern business practices and address the problem of smaller companies bearing a disproportionate amount of overall VAT compliance costs.
The current European Union rules on VAT currently allow Member States to apply a reduced rate of VAT (which can be as low as 5%) to two distinct categories of products. The new proposals would instead allow:
- two separate reduced rates (of between 5% and the standard rate chosen by the Member State) to be applied;
- one exemption from VAT (i.e. the "zero rate"); and
- one additional reduced rate set at between 0% and the other reduced rates applied.
In addition, the European Commission's proposals includes a plan to abolish the current complex list of goods and services to which reduced rate VAT can be applied, to be replaced by a new list of products which would always attract the standard rate of VAT in each Member State. However, the Member States would be required to ensure that the weighted average VAT rate in their jurisdiction is at least 12%.
In relation to SMEs, the European Commission issued proposals in an attempt to mitigate the "cliff edge" effect of VAT thresholds in each Member State which negatively impact growing SMEs. The proposals include plans for:
- a simplified VAT regime for all EU small business which fall under a €2 million revenue threshold, regardless of whether the businesses have already been exempted from VAT;
- Member States to be able to exempt all small businesses that qualify for a VAT exemption from various requirements (specifically those relating to identification, invoicing, accounting or returns); and
- a single turnover threshold of €100,000 below which companies operating in more than one Member State would benefit from the general VAT exemption.
While these proposals are still subject to negotiation and approval, they could, if enacted, represent a significant shake up of the VAT landscape across Europe.