Select Committee on European Scrutiny Twenty-Second Report




Draft Council Directive amending Directive 77/388/EEC as regards the Value Added Tax arrangements applicable to certain electronically supplied services and radio and television broadcasting services;

Draft Council Regulation amending Regulation (EEC) No. 218/92 on administrative co­operation in the field of indirect taxation (VAT) and introducing additional measures regarding electronic commerce.

Legal base:Draft Directive: Article 93 EC; consultation; unanimity

Draft Regulation: Article 95 EC; co-decision; qualified majority voting

Department:HM Customs and Excise
Basis of consideration:Minister's letter of 14 March 2002
Previous Committee Report:HC 152­xix (2001­02), paragraph 15 (13 February 2002)
Discussed in Council:12 February 2002
Committee's assessment:Politically important
Committee's decision:Cleared (decision reported on 13 February 2002)


  21.1  Both documents concern services, such as radio and television broadcasting, web-site designs, software and digitised music and film products, that are supplied electronically across borders. Under Council Directive 77/388/EEC, these services are liable to VAT in the country where the supplier is established. Thus where a supplier outside the Community sells a service to a customer in the Community, no liability for VAT arises. However, when a service is supplied from within the Community liability for VAT arises, regardless of whether the customer is located in the Community. Consequently, these existing VAT rules create a comparative disadvantage for suppliers in the Community.

  21.2  On 13 February we cleared both documents, but reaffirmed a request made by the previous Committee in July 2000 for further information. That Committee specifically requested information from the Minister concerning any measures that might be necessary to prevent non-EU businesses distorting competition by simply registering in Member States with the lowest VAT rate, and the outcome of any consultations the Government may have had.

The Minister's letter

  21.3  In her letter (dated 14 March 2002), the Paymaster General (Dawn Primarolo) provides the information requested and some further background material in response to points raised by our sister Committee in the Lords.

  21.4  As regards the practical implications of a registration regime for non­EU suppliers, the Minister says.

"Under the Commission's original proposals for a single place of registration in the EU for non­EU suppliers there was a risk that such suppliers would choose to locate in a Member State with a relatively low rate of VAT, making all their sales to private consumers from that location.

"This risk of distortion, in terms of location of registration and revenue flows, led Member States to reject this approach to the registration of non­EU suppliers. In the course of negotiations, the more sophisticated approach now featured in the Spanish Presidency's compromise text emerged.

"Under this new approach, a non­EU supplier will still register and account electronically for VAT in one Member State, so avoiding the compliance costs and administrative complexities resulting from multiple registrations.

"However, the supplier will identify on his VAT return the value of sales made to private consumers in each Member State and the VAT due on those transactions. Having collected these returns, the Member State in which the supplier is registered will periodically reallocate the relevant sums of VAT due to the other Member States.

"This approach thus avoids any distortion in terms of location of registration, and achieves the effect that goods sold by non­EU suppliers are taxed at the correct rate of VAT in the Member State where they are consumed."

  21.5  As regards the outcome of consultations with business, the Minister says:

"The UK's negotiation stance on the Directive has been well informed by input from the business community. Throughout the negotiations, HM Customs have maintained an effective dialogue with business both through formal channels (e.g. a dedicated e­VAT Forum on which major stakeholders are represented), and less formal ones such as ad hoc meetings. Priorities for UK business lie in the creation of a level playing­field with non­EU suppliers, both by removing VAT on exports and by ensuring that non­EU suppliers have to charge VAT on their supplies into the EU.

"Customs have also made use of their active involvement in parallel OECD­led work in this field to secure a better understanding of, for example, the priorities and concerns of non­EU suppliers, particularly those in the US. Non­EU suppliers have generally accepted the logic of a change to the taxation rules, and have been comfortable with the proposed use of the reverse charge mechanism for business­to­business transactions.

"However, a key concern for non­EU suppliers has been the nature of the tax collection regime to apply to business­to­consumer transactions, where they have repeatedly objected to the imposition of new and onerous obligations, especially where these would go beyond those placed on EU suppliers.

"The UK shared these concerns, and made clear in negotiations that:

  • one of the essential objectives of moving to an electronic solution in the medium­term (with taxation in the place of consumption) was to see all suppliers governed by identical rules and obligations;

  • and that any interim solution would have to be as simple as possible for non­EU suppliers to comply with.

"The UK achieved these objectives, and — while non­EU suppliers still have misgivings over the registration system proposed under the interim solution — it is clear to them both that this is much less onerous than originally proposed, and also that there is a clear commitment to move to the much more effective and efficient full electronic solution in the medium­term."


  21.6  We have already cleared both documents and recorded our dissatisfaction with the Department's failure to provide a prompt response to the previous Committee's request for further information. We provide this short report to inform the House and to complete the scrutiny process.

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Prepared 28 March 2002