EC presents action plan to combat ‘staggering’ VAT gap

KEY PRINCIPLES for a future single European VAT system, short term measures to tackle VAT fraud and plans to keep pace with today’s digital and mobile economy are the latest VAT measures to be presented by the European Commission.

The measures released by the EU’s executive body look to support Europe’s single market, to facilitate cross-border trade and to support Europe’s traditional markets against the rapidly increasing digital and mobile economy.

Combatting VAT fraud

The plan also looks to combat the growing ‘VAT gap’, which was almost €170bn (£137bn) in 2013. The commission estimates that cross-border fraud is costing the European Union €50bn a year in VAT revenue loss.

This is not the first time that the European Commission has actively tackled VAT fraud. In 2012, it launched a ‘quick reaction mechanism’ that would enable EU states to move more quickly to fight VAT fraudsters. The mechanism would allow an implementation of a reverse charge, where the recipient of goods is liable for VAT, rather than the supplier.

“Under the new rules, cross-border transactions would continue to be taxed at the rates of the Member State of destination (‘destination principle’) as today, but the way tax is collected would be gradually changed towards a more fraud-proof system,” stated the European Commission

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, said: “VAT is a major source of tax revenue for EU Member States. Yet we face a staggering fiscal gap: the VAT revenues collected are €170bn short of what they should be. This is a huge waste of money that could be invested on growth and jobs.

“It’s time to have this money back. We are also keen to grant Member States more autonomy on how to define their VAT reduced rates. Our Action Plan will deliver on each of these points,” continued the commissioner.

EC has ‘Rediscovered its sense of ambition’

Paddy Behan, an indirect tax services partner at Simmons Gainsford, told Accountancy Age that elements of the plan are well overdue.

“The intention to move towards the destination principle is something that we have seen before – It’s been on the EC’s agenda for many years,” explained Behan.

“Its policies used to focus on specifics and ‘easy wins.’ They have now rediscovered its sense of ambition. The proposals on the destination principle will allow member states to have greater flexibility on the treatment of member states without distorting competition. This will ease many political problems in relation to VAT, such as the ‘tampon tax’.”

“Even if only parts of this programme were to see the light of day, there would be very considerable benefits. The proposals on enhanced cooperation between tax authorities are timely, perhaps overdue, but in any event are essential to maintaining the integrity of the VAT system.