Peter Duchars of Russell Bedford considers how VAT is developing across the EC.
Anthony Barber, the then Chancellor of the Exchequer, introduced VAT in the UK in 1973 (as a precursor to entering Europe) at a rate of 10%, describing it as a simple and easy to understand tax. Forty years later, VAT has evolved into a different beast to deal with the changing nature of business supplies and products, and an expanding European Union (EU).
The initial expectation was that cross-border transactions would attract VAT in the country of the supplier – the origin principle. Increasingly, this has become politically unacceptable and the European Council recently decided that transactions will attract VAT in the country where the goods or services are used. This is not a completely new concept as this basis for charging VAT has existed for certain supplies for a while, but it means change for other supplies.
VAT and e-Services and Telecommunications
One example is the e-services and telecommunication sector. Currently, VAT is charged for business-to-consumer transactions based on the supplier's location. This is why many online sellers of these services have subsidiary companies in Luxembourg, which uses a lower standard rate of VAT than many other member states. The key supplies include downloadable e-services such as music, games, applications and telecommunication services.
Changes announced in 2008 will apply from 1 January 2015. From this date, VAT will apply where the non-business customer is resident. Information is available to help businesses prepare for the changes as, rather than charging VAT to EU customers at one rate, several rates will now apply – suppliers with customers in each member state will have to be prepared to account for VAT in 28 countries. The new VAT Mini One Stop Shop should make accounting for VAT easier as it will enable businesses to pay VAT to their home VAT authority, which will then pay the VAT to each member state.
Practical Problem of Accounting for Different VAT Rates
Businesses will still need to calculate and declare the relevant amounts of VAT to be paid to each country. This will be a challenge as VAT rates vary from 16% to 27%, but of greater concern to businesses will be how to decide on a VAT-inclusive price for goods. With an average VAT rate across the EU of around 21%, we expect many businesses to use this as a hypothetical VAT rate. This isn't unusual: some non-EU businesses already account for VAT in this way although many choose to set up EU subsidiaries instead. Whether these subsidiaries will continue after 1 January 2015 remains to be seen.
VAT Mini One Stop Shop
EU Commissioner for taxation Algirdas Semeta has stated that the Mini One Stop Shop will be monitored closely as the way to achieving the underlying principle of taxation at the place where goods and services are used. We anticipate that further changes to the place of supply rules will happen in the future, so that VAT does not drive where businesses locate themselves.
The Future of VAT
Late 2010 also saw the start of a consultation by the European Commission (EC) into the future of VAT across the EU, entitled Towards a simpler, more robust and efficient VAT system. The consensus was that the VAT system needs changing, especially for sales inside the EU. Although VAT legislation across the member states is founded on the same source, the old Sixth Directive, implementation varies significantly from country to country. This has become an obstacle to trade within the EU. In addition, there is a worrying level of fraud, at a level that is not easy to determine.
So what can we expect in the future? One of the first EC initiatives was to review those reduced rates that it believes it should eliminate or restrict. Furthermore, to achieve the objectives in its consultation paper the EC wants greater VAT consistency across the member states; this could mean greater uniformity on rates, thresholds and the scope of exemptions. The EC will enforce this by infraction proceedings, the process by which the EC takes a member state to the European Court of Justice.
Whatever the outcome of these discussions it is likely there will be changes to the scope of VAT. However, it is also likely change will be slow and will meet opposition from member states. The UK, for instance, has given a guarded reaction: while it is in favour of the basic principle it has indicated that it will counter unhelpful ideas, especially those that may erode UK national sovereignty.
VAT has never been a simple and easily understood tax, but it is one that continues to change and challenge businesses.