5 VALUE ADDED TAXATION
(26118)
14248/04
COM(04)728
| Draft Directive amending Directive 77/388/EEC with a view to simplifying value added tax obligations
Draft Directive laying down detailed rules for the refund of value added tax, provided for in Directive 77/388/EEC, to enable taxable persons not established in the territory of the country but established in another Member State
Draft Regulation amending Regulation (EC) No. 1798/2003 as regards the introduction of administrative cooperation arrangements in the context of the one-stop scheme and the refund procedure for value added tax
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| Legal base | Article 93 EC; consultation; unanimity
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| Document originated | 29 October 2004
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| Deposited in Parliament |
10 November 2004 |
| Department | HM Treasury
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| Basis of consideration |
EM of 24 November 2004 |
| Previous Committee Report |
None |
| To be discussed in Council
| Not known |
| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
5.1 In 2003 the Commission published a Communication[14]
with a programme for improving the operation of the value added
tax (VAT) system within the context of the internal market.
The document
5.2 The three legislative proposals in this document are presented
as a package dealing with simplification of VAT on cross-border
supplies under that programme. They are:
- a draft Directive to amend the rules to introduce a one-stop
scheme for VAT — a technologically-based compliance framework
which would allow businesses trading across borders to deal predominantly
with a single tax authority;
- a draft Directive to provide detailed rules for
the refund procedure for businesses established in one Member
State, where VAT is incurred by them in another Member State;
and
- a draft Regulation to amend administrative cooperation
arrangements to support the one-stop scheme and refund procedure.
5.3 The legislative proposals cover six key areas:
- introduction of a one-stop
scheme;
- revision of the Eighth VAT Directive refund
procedure;
- extension of the "reverse charge mechanism";[15]
- simplification of VAT obligations for small and
medium-sized enterprises (SMEs), including allowing Member States
more discretion over registration thresholds;
- revision of the distance-selling arrangements;
and
- consequential changes to enable information exchange.
The first draft Directive deals with the first, third,
fourth and fifth matters and partly with the second. The second
draft Directive also deals with the second issue. The draft Regulation
covers the sixth matter.
The One-Stop Scheme
5.4 Currently a business making supplies for which
it would be liable to pay VAT in more than one Member State is
obliged to register and comply with the rules in each of those
Member States. These rules have been simplified for non-EU e-commerce
operators with the introduction of a one-stop scheme, so that
they only have to deal with one VAT authority.[16]
The proposed legislation would introduce a comparable scheme,
with technological improvements, for all relevant EU businesses
wishing to use it for cross-border activities, including supplies
of goods, business to business (B2B) services where a reverse
charge is not applicable and business to consumer (B2C) services.
5.5 Use of the scheme would be optional but businesses
opting to use it would have a single point of contact within the
EU for registration and for submission of VAT returns and their
VAT obligations would be fulfilled through electronic means. Responsibility
for the assessment and control of the tax would remain with the
Member State of consumption. The proposal would also enable businesses
to offset input tax against output tax within the scheme.
The Eighth VAT Directive Refund System
5.6 The current Eighth VAT Directive refund procedure
enables a business incurring input VAT on expenditure in a Member
State where it is not established and makes no supplies, to recover
input VAT directly from that Member State (the Member State of
purchase). It is a burdensome paper-based procedure and the Commission
originally put forward a proposal to change it in 1998. The Paymaster
General (Dawn Primarolo) told us, in May 2003, that work on this
proposal was suspended. [17]
5.7 Under the present proposal for modernising the
refund procedure:
- requests for refunds would
continue to be dealt with by the Member State where the VAT was
paid;
- the amount refundable would be determined under
the deduction rules of the Member State where the expenses were
incurred; and
- the repayment would be made directly by that
Member State to the requesting business.
However, the procedure would be supported by technology
in a similar way to that proposed for the one-stop scheme. Processing
time would be reduced, with timescales for making refunds (within
three months of receiving data or any additional information subsequently
requested) and payments of interest of 1% per month for deadlines
not met.
5.8 The proposal would also define the scope of expenses
to which input tax exclusions (blocks) could apply as:
- motorised road vehicles, boats
and aircraft;
- travel, accommodation, food and drink; and
- luxuries, amusements and entertainment.
Member States would have to abolish any existing
blocks under standstill provisions that fall outside the new scope.
However, Member States could introduce new blocks, extend existing
blocks or reintroduce blocks previously given up, if within the
scope. (At present Member States have no flexibility: they can
merely retain, reduce or give up existing blocks agreed under
the standstill provisions and, once reduced or given up, these
blocks cannot be re-introduced.)
An extension of the reverse charge mechanism
5.9 The change in the first draft Directive to the
reverse charge mechanism is a key simplification for B2B supplies
subject to VAT in a Member State where the business customer is
established. By making the business customer liable to account
for the tax, it reduces the need for business suppliers to register
in other Member States. The mechanism is already obligatory for
certain supplies. The proposal would broaden the scope to include
cases where a non-established business supplier makes supplies
of:
- installed and assembled goods;
- land-related services; and
- other services relating to cultural, artistic,
sporting, scientific, educational, entertainment or similar activities;
ancillary transport; and valuations of, and work on, movable tangible
property.
Simplification of SME VAT obligations
5.10 The first draft Directive would introduce more
flexibility for determining domestic VAT registration thresholds
— the limit under which businesses need not register for
VAT. Member States would be able to adopt a domestic registration
threshold of up to €100,000 (£69,570) and could set
different thresholds for goods and for services. (At £58,000
(over €80,000) the UK has the highest VAT registration threshold
in the EU.)
Distance-selling arrangements
5.11 The current distance-selling arrangements, introduced
with the Single Market in 1993, provide that distance-sales of
goods are normally taxable in the Member State of destination.
This requires suppliers of such goods to register in that Member
State. But distance-sales of goods are taxable in the Member State
of departure if the total value of supplies of goods to the Member
State of destination in the previous calendar year did not exceed
a limit of €100,000 (£69,570), with Member States being
able to apply a lower limit of €35,000 (£24,350) if
they wish (the UK applies the higher limit). Alternatively businesses
can opt to use the normal rules. The distance-selling arrangements
do not apply to excise goods, which are always taxed in the country
of destination. The current system requires suppliers to monitor
the turnover of supplies made in each Member State.
5.12 The proposed legislation would simplify the
arrangements so that a single threshold of €150,000 (£104,355),
calculated across all Member States, would apply. Where the threshold
is exceeded businesses would be able to use the one-stop scheme
to simplify their VAT obligations. Businesses would still be able
to opt for the normal rules if they preferred. The option could
be taken separately (as now) for each Member State. Where businesses
made supplies under both the normal rules and the distance-purchasing
rules, the threshold of €150,000 (£104,355) would still
apply but would include the values of sales made under both rules.
Information exchange
5.13 The draft Regulation would make changes to VAT
administration cooperation arrangements so as to enable a system
of exchange of information between Member States to support both
the proposed VAT one-stop scheme and the revised Eighth VAT Directive
refund procedure.
The Government's view
5.14 The Minister says:
"The Government broadly welcomes this package
of VAT measures, which are aimed at easing the burden of VAT compliance,
primarily for businesses involved in cross-border trade. The measures
include a one-stop scheme for VAT — a technological compliance
framework that would allow such businesses to deal predominantly
with a single tax authority. The measures also include modernisation
and simplification of the Eighth VAT Directive refund procedure,
a welcome simplification for business. The package therefore supports
the Government objectives to reduce burdens on business although
we will, of course, want to consider carefully the detail of the
proposals.
"In addition, the package supports the Government
aims to achieve taxation in the place of consumption. The one-stop
scheme is an important building block in the move towards general
taxation in the place of consumption for VAT on business to consumer
(B2C) services."
5.15 On the financial implications the Minister adds:
"Given the extent of this package of measures,
the impact is currently difficult to quantify. However, to the
extent that much of what is proposed would retain the current
status quo in terms of VAT liability, the overall impact on UK
revenue is likely to be broadly neutral."
5.16 The Minister also sends us a Regulatory Impact
Assessment. This notes that formal consultations have yet to be
undertaken by Customs and Excise. But it concludes that "This
package of measures provides a clear benefit to UK suppliers,
businesses and consumers as it will facilitate cross-border trade".
Conclusion
5.17 This is a potentially useful package of measures.
But before considering the document further we should like to
see the outcome of the Department's consultations. Meanwhile we
do not clear the document.
14 (24978) 13853/03; see HC 42-i (2003-04), para 1
(3 December 2003). Back
15
Where, in a business to business transaction the supplier is VAT
registered but the business customer, who would normally account
for the transaction, is not, the supplier accounts for that transaction. Back
16
See (23163) 5954/02; HC 152-xxii (2001-02), para 21 (20 March
2002). Back
17
See (19251) 9741/98; HC 63-xxxii (2002-03), para 19 (17 September
2003). Back
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