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The future of VAT

by Tax Faculty Team on 13.06.2011 14:41

Tax Faculty responds to EC consultation

 

The Tax Faculty has submitted its comments in response to the European Commission Green Paper on the future of VAT published in December 2010. In our opinion only two sets of rules should exist, those for transactions wholly between EU parties and those involving parties outside the EU.

 

Our key points are:

 

  • Adopt the origin principle for all supplies within the EU
  • There should be only two VAT systems – domestic and international
  • Allow full input tax recovery relating to business or charitable activities
  • Abolish the concept of exemption - all supplies either positive rated or outside the scope with recovery
  • Substantially reduce the range of supplies not subject to VAT
  • Eliminate all reporting requirements other than VAT returns
  • Abolish the concept of input tax for public authorities – use alternative government funding to substantially reduce administration and compliance costs
  • All public transport to be outside the scope with recovery

 

When preparing our response, our three key considerations were:

 

1. Simplification of the VAT system

 

At present there are essentially three sets of rules for VAT compliance, depending upon the countries in which a supplier and customer are located:

 

  • domestic transactions;
  • transactions between EC Member States; and
  • transactions with the rest of the world.

 

For transactions between EC Member States, the rules are further complicated by having to determine and prove if the customer is in business and whether the specific supplies being made fall within the rules for goods or services. We believe that significant benefits of simplification could and should be achieved by reducing this to two sets of rules – one for domestic supplies and the other for international supplies.

 

It is unrealistic to expect businesses, especially small businesses, to know the VAT rates applicable to all the supplies that they may make to customers located in all the other Member States in which they trade. For B2C supplies, the cost of registering in another Member State and maintaining a VAT registration is likely to be prohibitive, especially if a second currency is involved.  That is why, as can be seen from many websites, a large number of SMEs will not supply to customers in other Member States.

 

We suggest that the origin principle should be adopted, as suppliers would not then need to establish where within the EU their customer belonged, or whether they were making a purchase in a business or private capacity.

 

2. Reduction in the burdens on businesses and tax administrations

 

The present reporting requirements are onerous, particularly for supplies of goods or services between EC Member States.  The requirements for completing Intrastat returns and EC Sales Lists make sales to other EC Member States relatively unattractive and a barrier to intra-EU trade, particularly for smaller businesses that do not have the necessary resources or expertise to meet these requirements. 

 

We are of the opinion that changes should be made to make the completion of these additional returns unnecessary.

 

3. Protection of VAT revenue against fraud

 

It has long been thought that to charge VAT on supplies within the EU would be the most effective method of reducing fraud.  In common with the interests of simplification and reduction in reporting requirements, this also suggests adoption of the origin principle.

 

Our full response, showing our answers to the 33 questions posed in the consultation document is published as TAXREP 35/11. The answers we provided are based on the guiding principle that only two sets of rules should exist, these being for transactions wholly between EU parties and those involving parties outside the EU.