Taxation: Questions and Answers on reduced VAT rates
What EU rules are in place for VAT rates?
Under the EU VAT Directive, Member States must apply a standard VAT rate of no less than 15% to the vast majority of goods and services. Member States also have the option of applying one or two reduced rates of no less than 5% to a restricted list of goods and services.
This list of eligible goods and services is annexed to the Directive and must be strictly respected i.e. Member States cannot interpret it flexibly.
Some examples of goods and services eligible for a lower rate include: foodstuffs, medicines, medical equipment for the disabled, books on all physical means of support, newspapers, periodicals, passenger transport, admission to shows, theatres, museums, etc.
In addition, there is a multitude of derogations on the application of zero rates, super-reduced rates lower than 5%, and reduced rates for products or services not usually eligible.
Some of these derogations were granted during the negotiations in Council or as part of an Accession process. Other particular derogations are included in specific articles of the VAT Directive, such as the possibility to apply a reduced rate to the supply of natural gas, electricity or district heating in certain circumstances.
Why is a review of reduced VAT rates necessary?
The fundamental idea behind VAT is to have a broad-based, universally applied consumption tax. VAT is recognised to be one of the most growth-friendly types of taxes, and is an important source of income for national budgets (accounting for around 20% of all revenues).
However, the wide-scale use of reduced rates by Member States has chipped away at their tax bases.
Limiting the use of reduced VAT rates and exemptions could provide Member States with important new revenue, without having to increase the standard VAT rate.
Studies show that the standard rate could actually be reduced by up to 7.5 percentage points, in some cases, if all reduced rates were to be removed.
In addition, the divergent approach to reduced rates across the Member States has created complexity for EU businesses.
They are currently faced with a large number of different rates across the Single Market, rather than a relatively harmonised system as was envisaged originally.
An economic evaluation carried out by the Commission also confirmed that the use of reduced rates is often not the most suitable instrument for pursuing policy objectives, particularly for ensuring redistribution to poor households or encouraging the consumption of a good that is deemed socially desirable.
In fact, the existing application of reduced rates translates into significant subsidies for businesses, without consumers feeling the benefits of lower final prices.
Moreover, certain reduced rates appear now to contradict wider EU objectives, such as energy efficiency and climate change.
Finally, new questions have arisen that didn’t exist when the rules and list of eligible goods and services for reduced rates were implemented. For example, fast-paced technological developments have led to questions such as whether digital and non-digital products, which serve similar purposes, should be taxed in the same way.
For all these reasons, and as part of the work to make the EU VAT system simpler, more efficient and more robust, the Commission feels that a fundamental review of the reduced VAT rates applied across the EU must be carried out.
How is the Commission conducting the review of reduced VAT rates?
In the Communication on the future of VAT (VAT Strategy) last December, the Commission set out the following guiding principles for a review of reduced VAT rates:
- Abolition of those reduced rates which constitute an obstacle to the proper functioning of the internal market;
- Abolition of reduced rates on goods and services for which the consumption is discouraged by other EU policies;
- Similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect; so that the convergence between the on-line and the physical environment is addressed.
These principles are now being used to guide an assessment of reduced rates, which the Commission is conducting in close cooperation with businesses and other stakeholders. The public consultation launched today is part of that assessment. It focuses its questions strictly on the 3 criteria laid down, in order to ensure well-targeted and relevant feedback.
The results of this consultation, along with a number of further studies that will be carried out as part of the impact assessment, will feed into new proposals on reduced VAT rates, which the Commission will table next year.
Does the Commission plan to abolish some or all reduced VAT rates?
This consultation is part of the assessment process, and does not pre-suppose the elimination of any particular reduced rate at this stage.
The Commission will only make proposals on the possible abolition or introduction of certain reduced rates next year, once it has completed its thorough review and gathered extensive feedback.
Moreover, it should be remembered that even if the Commission were to propose getting rid of one reduced VAT rate or another, this would have to be unanimously endorsed by Member States before it could happen.
So the review of reduced rates will be a holistic and very inclusive one.
The full list of reduced VAT rates applied in each Member State can be found here: (table of rates)
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