VAT: European Commission proposes more flexible VAT rates and enhances special scheme for small enterprises

On 18 January the European Commission presented the awaited third part of its value added tax (VAT) package, consisting of two draft guidelines on VAT rates and the special scheme for small enterprises. EBC welcomes the overhaul of the VAT rules, especially in regard to further simplification measures for small enterprises and the continued possibility for Member States to apply reduced VAT rates to construction and renovation works.

More flexibility for Member States to set VAT rates

The European Commission’s proposal offers Member States the flexibility to choose in addition to their standard VAT rate of minimum 15%:

·         two separate reduced rates between 5% and the standard rate;

·         a “super reduced rate” set between 0% and the reduced rate; and

·         one VAT exemption.

In all cases, the prerequisite for this is that the reduced rates benefit the final consumer and that the setting of these rates pursues an objective of general interest. However, Member States will have to ensure that the weighted average VAT rate is at least 12% in order to avoid unfair competition. The currently existing list of goods and services to which the reduced rates can be applied is replaced by a list of goods and services for which the reduced rates cannot be used, e.g. weapons, alcohol and tobacco.

Reduced VAT rates have been a priority for EBC and its member organisations since 1997, when EBC was amongst the promoters of a reduced VAT rates campaign. Since 1999 reduced VAT rates apply to labour-intensive services in the construction sector (first in a trial period and since 2009 on a permanent basis) such as provision, construction, renovation and alteration of housing, as part of social policy. Thus EBC is glad to see that this possibility continues to exist for Member States and encourages them to make further use of it in order to renovate the building stock in the European Union.

Enhanced special scheme for small enterprises to reduce their VAT costs

The proposed measures regarding the special scheme for small enterprises include a EUR 2 million revenue threshold (coherent with the definition of micro enterprises) across the EU, under which small businesses would benefit from simplification measures, whether or not they have already been exempted from VAT. Small enterprises temporarily exceeding the threshold set by a Member State, can continue to use the exemption for a maximum duration of 1 year as long the threshold is not exceeded by more than 50%. Furthermore the proposal offers the possibility to release all small businesses that qualify for a VAT exemption (threshold no higher than EUR 85 000 for enterprises within the Member States territory) from obligations related to identification, invoicing, accounting or returns. The new SME Scheme does no longer provide the possibility of a graduated tax relief.

EBC supports simplified obligations for non-exempt small enterprises e.g. in regard to the storage of invoices or the abolishment of interim payments, and hopes these will reduce red tape and further harmonise simplified VAT obligations for small enterprises between Member States.