Lack of clarity from the UK government hampers scrutiny of EU proposals for VAT reform

Jan Garioch CA summarises a report from the House of Commons European Scrutiny Committee ‘Value Added Tax: EU proposals for reform and the implications of Brexit’

The House of Commons European Scrutiny Committee has published its report into the EU proposals for reform of the Single EU VAT Area.

The key proposal is to bring an end to the transitional system which has operated since 1992, and which requires cross-border supplies of goods to be zero-rated and the buyer to reverse charge himself for VAT.

This transitional system created opportunity for fraud and has been exploited by missing trader and carousel fraudsters. Therefore, the EU has brought forward proposals to make this system permanent in a way which aims to close off fraud opportunities.

In broad terms it is proposed that suppliers will take on the responsibility for accounting for VAT on cross-border business to business sales, so reverse charge by the customer falls away in most cases.

At first this will be for goods only, and for cross-border supplies of services at a later stage. To mitigate the burden on suppliers, it is proposed to simultaneously introduce the one-stop shop to allow suppliers to pay VAT on sales to any member state in their own country and to allow deduction of input VAT via the same system.

To further mitigate the burden on suppliers, it is proposed that the reverse charge mechanism is retained where the buying business has ‘certified taxable person’ status (i.e. regarded as a reliable taxpayer).

The EU’s proposals also aim to make Member States freer to apply reduced rates and zero rates than they are now. This is because harmonisation of VAT rates matters less to the success of the current proposals than it did to earlier plans for a system based on the origin principle where no distinction would have been made between domestic and intra EU transactions.

The committee concludes it does not have enough information on the UK government plans post-Brexit to reach a decision on the EU’s proposals. It cannot rule out that these proposals would have to be implemented in the UK despite the fact they are unlikely to take effect until 2022 at the earliest.

It has requested more information – but at present it suspects that the UK wants to remain aligned with EU VAT law, stating ‘It appears the Government is seeking to remain aligned with EU VAT law to minimise new barriers to trade, as it has not told the Committee with respect to any of the VAT reform proposals that it categorically will not apply to the UK.’

Since the committee feels it lacks information, it does not present formal conclusions on the proposals at this stage but it flags up competing pressures in Brexit.

On one hand, if UK businesses leave the Single EU VAT area without any form of agreement, the committee finds there will be substantial barriers to trade. Any goods exported from the UK to the EU will be subject to a VAT liability being assessed by Customs officials at the border. Likewise, goods imported from the EU will attract VAT liability as soon as they enter the UK. The benefit of the distance selling threshold and the mini one-stop shop for telecom services will be gone.  Any taxable sale in the majority of remaining Member States would require the appointment of a tax representative as the person liable to pay the VAT.

On the other hand, the committee is concerned that to avoid the trade barrier above the UK may have to continue its adherence to the VAT Directive with considerably less influence over it than it has now since the power of veto will be lost.

The committee also acknowledges that reservations are being expressed across the EU about the design of the proposals. They have heard concerns about two systems trying to run in parallel. Confusion or potential fraud could arise as the switch of responsibility to the supplier is incomplete where the purchaser is certified. Concerns have also been raised about the ability to get a certification process operating smoothly and even-handedly.