There have been several updates and proposals issued by the EU in recent months which, if adopted, could significantly change the way that VAT needs to be managed by companies trading in the EU. Some of these changes are still in the process of being discussed and finalised whilst others will have effect from 1 January 2019. This means that businesses will need to ensure that resources are in place to manage these on-going challenges effectively and efficiently.
Here are some of the key proposals and legislative updates.
1. New B2C rules
Currently, when a business provides electronically supplied services to a private individual who is in a different EU Member State, that supply is subject to VAT in the customer’s country. his rule applies to the first sale which is made (there is no threshold), and has been causing a major issue in the UK because many businesses which are not VAT registered (due to the high £85,000 domestic threshold) must account for VAT in other EU Member States. With effect from 1 January 2019, these supplies will be subject to a €10,000 threshold before they are subject to VAT in the country of the recipient. This will be particularly beneficial for businesses making relatively low numbers of non-domestic sales, as their compliance obligations and VAT complexity will reduce.
Perhaps more significantly, the distance selling (DS) thresholds for B2C supplies of goods are to be overhauled. At the moment, businesses need to register and account for local VAT when they breach the DS thresholds (which are either €35k or €100k – the level is set by the local tax authority and the majority apply the lower limit). With effect from 1 January 2021, supplies of these goods made within the EU will be subject to a lower €10,000 threshold before they are subject to VAT in the country of delivery. This will mean businesses need to have greater understanding of the rules in the markets where they sell to such as different VAT rates. To offset that burden though, it is envisaged that a “one stop shop” (mirroring the MOSS for digital services) will be created to help ease compliance burdens. Whether that incorporates or relieves businesses from other reporting requirements such as SAF-T remains to be seen.
2. Removal of low value consignment relief (LVCR)
Currently, goods imported into the EU with a value of less than €22 are exempt from VAT (although this is a maximum limit and some countries apply a lower limit). This has been a major source of frustration for EU-based companies in that non-EU businesses often under report the value of goods they supply to enjoy the exemption. This then leads to businesses from outside the EU benefitting from an unfair tax advantage as there is no VAT charged on their sales.
Several non-EU countries have taken steps to protect local suppliers from this and “level the playing field” by removing LVCR (Australia has similar changes taking effect from 1 July 2018). The EU intends to do away with LVCR and instead require all third country suppliers to register for VAT in the EU. This will make them subject to the same taxation and rules as the local suppliers and provide more revenue to the EU Member States. However, it will likely lead to increased compliance costs and checks may also arise at the borders – a one stop shop for these suppliers is also envisaged to ease those problems.
3. Requirement to make VIES mandatory
VIES is the EU database which includes details on the VAT registrations of taxpayers from around the EU. Many businesses rely on this to verify the status of their customers and hence determine the VAT treatment that applies to supplies they make. However, because not all EU Member States upload all taxpayers to the database, it cannot always be relied upon.
To remedy this issue, there are plans to make it mandatory for tax authorities to upload all VAT registered businesses to VIES. This is because the VAT legislation will be changed so that use of VIES will be obligatory to determine the VAT liability of supplies. Consequently, tax authorities will have to update and monitor VIES in much more detail so there is a uniformity of data from each country captured. This should make it easier for businesses to manage VAT obligations and provide a degree of greater certainty for them.
4. End of transitional VAT period
The EU wants to adjust the current rules for supplies of goods when they are moving cross border in the EU. Instead of the current two stage process of dispatch and acquisition occurring there will be just one transaction for VAT purposes with VAT settled in the country of consumption.
If the new rules are adopted then several developments could occur:
- Goods will have a place of supply where the movement of the goods ends – now they treated as supplied where transport of the goods begins
- The supplier will have to account for VAT in a third country it is probably not established in – a need to understand local rules will be required
- There is a proposal that if the supplier is not registered for VAT in the country where VAT is due then it will be allowed to declare the VAT via a single One-Stop-Shop (OSS) where input tax will be recoverable. This would be like a much larger version of the existing MOSS but to date there has been no mention as to whether supplementary returns (like SAF-T) demanded by tax authorities would still be required and how they would fit within this new arrangement
- The need to submit EC Sales Lists (recapitulative statements) may be removed because new reporting requirements would make them redundant
5. Certified taxable person (CTP) status
Finally, taxpayers will be able to apply to their local tax authority to become a CTP, a newly envisaged status for a business. This will give recognition that the business can be considered to be a reliable taxpayer. Each business will need to apply for CTP status within its own EU Member State where established, but once achieved it would be applicable across the EU to obtain access to simplifications for VAT reporting across many different transaction types. Such benefits may drive businesses to obtain CTP status to make their compliance obligations simpler.
As ever, there is a spectrum of probability about whether particular changes will actually be implemented. The changes for B2C suppliers are most likely to take effect; the others are still subject to much debate and discussion before legislation relating to them is published. Germany, for example, has long standing reservations about extending the one-stop shop; and the Dutch have already pushed back against plans for a new VAT regime. Quite how these proposals will interact with the other myriad changes taking place across the EU indirect tax landscape (real time reporting, e-invoicing, Brexit and so on) is also unknown. Hence, businesses need to pay close attention to developments if they wish to remain compliant in the changing world of tax legislation and reporting.