Step 1: Action Plan on VAT – Towards a single EU VAT area
7 April 2016: The European Commission adopted an Action Plan on VAT which proposes a number of reforms to the VAT system such as:
- Future EU VAT system for cross-border trade
- Immediate measures to tackle VAT fraud
- Support for e-commerce and SMEs (to modernise and simplify VAT for cross-border e-commerce as part of the Digital Single Market strategy)
Most importantly for charities it proposes options for a modernised policy on EU rules governing VAT rates. The European Commission has confirmed that it will not scrap zero or reduced rates, instead aiming to modernise VAT rates policy and give more flexibility to Member States on VAT rates. The European Commission has put forward two options for giving Member States more freedom in relation to VAT:
Option 1: Extension and regular review of the list of zero and reduced rates
- Maintain the minimum standard rate of 15%.
- The list of goods and services that can benefit from reduced rates would be reviewed regularly, with Member States suggesting potential adjustments.
- All currently existing reduced rates and derogations would be maintained. They could also be made available to all Member States to ensure equal treatment.
Option 2: Abolition of the list of zero and reduced rates
- Abolish the list of goods and services that can benefit from reduced rates.
- Member States would have control of the number of reduced rates and their level they could put in place. But this would require safeguards to avoid unfair tax competition within the single market and to prevent fraud and could increase compliance costs.
- Member States would also have to continue abiding by EU legislation, such as Single Market and competition rules and the EU’s economic governance framework.
ECCVAT supported Option 2 and greater flexibility for Member States so long as existing charity reliefs were maintained. For more detail see here ECCVAT’s response to the Action Plan proposals.
Step 2: Proposals on VAT rates
In addition to keeping a standard VAT rate of minimum 15% the European Commission has proposed that Member States be now able to put in place:
- Two separate reduced rates of between 5% and the standard rate chosen by the Member State
- One exemption from VAT (or ‘zero rate’)
- One reduced rate set at between 0% and the reduced rates
The current list (Annex III) of goods and services to which reduced rates can be applied would be abolished and replaced by a negative list (a new Annex IIIa) to which reduced rates cannot be applied (the standard rate of 15% or above would always be applied to the goods and services mentioned on the list). This includes items such as weapons, alcoholic beverages, gambling and tobacco.
Member States will have to ensure that the weighted average VAT rate applied to those transactions for which VAT cannot be deducted is at least 12%. This is designed to safeguard revenues.
The new regime would also mean that all goods currently enjoying rates different from the standard rate can continue to do so. Existing reduced rates, including derogations, that are legally applied in Member States will expire with the introduction of the definitive VAT regime which is currently being negotiated in the Council. The proposals mean that, even once these derogations expire, countries will be able to maintain the reduced rates with very few exceptions. It will also allow all other Member States to apply similar derogations if they so wish.
Step 3: Opinions of the European Parliament and the European Economic and Social Committee (EESC)
May/October 2018: The European Parliament and the EESC gave their opinions on the European Commission’s VAT proposal which:
- Support the Commission’s proposal
- Point out the problem of irrecoverable VAT costs for associations and organisations providing assistance to disadvantaged people
- Emphasised that reduced rates and exemptions shall be given in priority to goods or services having a positive impact on the general interest, such as cultural, social or environmental benefits.
NB: The Council is not bound by the European Parliament and EESC’s positions but only by the obligation to consult them.
ECCVAT made representations to the Commission, European Parliament and the EESC. For more details see ECCVAT’s position paper – November 2018
Key asks include:
- Recognising the specific position of charities to ensure they receive the benefit of reduced rates and zero rates
- Allow the deduction of input VAT in cases of non-taxable services and deliveries provided by charities and other public benefit organisations
- Current derogations and reduced rates to be protected and made available to charities and other public benefit organisations across Europe
- Introducing more regular reviews of the list of the excluded items in Annex IIIa
It is now for the Council (the Member States) to decide whether to adopt, amend or reject the Commission’s proposal.
Other related documents
- Green Paper on the Future of VAT (1 December 2010)
- Communication on the Future of VAT (2011)
- Public Consultation on Review of Existing Legislation on VAT Reduced Rates(October 2012 – January 2013)
- ECCVAT’s response (January 2013)
- European Commission summary report (April 2013)