Documents considered by the Committee on 30 March 2010 - European Scrutiny Committee Contents

10   Value added taxation



COM(09) 21

Draft Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the rules on invoicing

Legal baseArticle 113 TFEU; consultation; unanimity
DepartmentHM Treasury
Basis of considerationMinister's letter of 29 March 2010
Previous Committee ReportHC 19-ix (2008-09), chapter 4 (4 March 2009)
Discussed in Council16 March 2010
Committee's assessmentPolitically important
Committee's decisionCleared


10.1  Council Directive 2001/115/EC, the Invoicing Directive, introduced common Community rules on VAT invoices, thought necessary for the single market to function properly. The Invoicing Directive has been incorporated into Council Directive 2006/112/EC, the VAT Directive, Article 237 of which says "The Commission shall present, at the latest on 31 December 2008, a report and, if appropriate, a proposal amending the conditions applicable to electronic invoicing in order to take account of future technological developments in that field".

10.2  In that report, published in January 2009, the Commission took the opportunity to discuss wider issues perceived as weaknesses in VAT legislation. Thus the Commission discussed not only technological developments in e-invoicing and VAT obstacles to promoting e-invoicing but also:

  • measures to further simplify, modernise and harmonise VAT invoicing rules, covering issue of an invoice, invoice details and storage of invoices;
  • measures to help tackle VAT fraud, covering chargeability of tax on intra- Community supplies and right of deduction; and
  • other simplification measures, covering cash accounting.[23]

10.3  On the basis of that report the Commission suggested the need for further legislation, as proposed in this draft Directive. The draft Directive would:

  • address the varied application of the VAT rules on e-invoicing across the Community, a current deterrent to its widespread acceptability to and use by businesses. This is to be achieved by allowing businesses to send electronic invoices under the same conditions as they would send paper invoices and, in particular, by removing from Member States the option to require use of an advanced electronic signature or electronic data interchange;
  • address variations in application of the current invoicing rules across Member States, in order to simplify matters for businesses and to enable them to take advantage of options such as self-billing and summary invoices. The provisions concern mainly the conditions for issuing an invoice, the content of VAT invoices and the storage of invoices;
  • enhance anti-fraud measures by complementing provisions in a draft Directive and draft Regulation,[24] primarily concerned with the shortening of the timeframe for recapitulative statements.[25] The proposal would create a single date on which tax becomes chargeable, being the date of the chargeable event as determined by the time of the supply. By requiring an invoice to be issued by the 15th day of the month following the chargeable event, the invoice would remain the principal document evidencing intra-Community supply;
  • enhance anti-fraud measures by requiring the customer to hold an invoice in order to exercise the right to deduct input tax in all cases where the supplier is required to issue an invoice — at present in certain cases, such as reverse charge transactions, the customer is not obliged to hold a valid invoice in order to exercise the right to deduct. But the proposal would not prevent Member States from allowing a right of deduction, subject to other evidence, when a valid invoice is not available; and
  • enable all Member States to offer the cash accounting scheme[26] as an option to SMEs with a turnover falling below a threshold, to be determined by them but no higher than €2.00 million (£1.80 million) — the UK and some other Member States currently operated this scheme by way of derogation.[27]

10.4  When we considered this proposal, in March 2009, we noted both the Government's positive view of the e-invoicing and cash accounting aspects of draft Directive and its caution about the proposed anti-fraud and more general invoicing measures. We asked, before considering the document further, to have information about:

  • the outcome of the Government's discussions with UK business about the proposed measures;
  • the Government's impact assessment; and
  • in due course, developments in negotiation of the proposed legislation.

Meanwhile the document remained under scrutiny.[28]

The Minister's letter

10.5  The Financial Secretary to the Treasury (Mr Stephen Timms) now says that the Government's discussions with UK business about the proposed measures have been carried out informally during negotiation of the proposed legislation. On the interplay between the views of UK business and the negotiations, the Minister reminds us first of the intention to address the varied application of the VAT rules on electronic invoicing across the EU, a current deterrent to its widespread acceptability and use by businesses, by removing the options that enabled Member States to require the use of an advanced electronic signature or electronic data interchange. He comments that this would enable businesses to be free to send electronic invoices under the same conditions as they would send paper invoices, an approach which the Government and UK business supports.

10.6  Turning to the part of the draft Directive concerning the VAT rules on invoicing more generally, where the aim is to remove some inconsistencies in the current rules, the Minister says that:

  • this was mostly uncontroversial and supported by UK business;
  • one aspect, however, was opposed by the exempt sector, including in particular financial and insurance businesses;
  • this was a provision making it compulsory for all businesses to issue VAT invoices for all supplies, including those exempt from VAT, in contrast to the present situation which allows Member States to release businesses from that obligation in respect of exempt supplies made in their territory;
  • this option applies in the UK, so the proposed provision had a potential negative impact on these exempt sectors, as it would have increased their administrative burdens substantially; and
  • the finance and insurance sectors were able to provide a solid body of evidence to demonstrate that and the Government was therefore able to pass this information on to other Member States to help inform the negotiation process.

10.7  On that part of the draft Directive concerning measures to combat VAT fraud, the Minister reminds us that the Government remained to be convinced of the arguments for including fraud measures within this set of proposals, which were predominantly for the benefit of business. He then says that:

  • in the event UK business made strong representations about the way the proposed shortening of the timeframe for recapitulative statements would work in practice;
  • there were two principal objections to this proposed change;
  • first, as drafted, the provision would also impact on the treatment of domestic invoices — while businesses could accept that there was a rationale for a change with regard to intra-EU supplies, they could see no sense in changing the current treatment Member States apply to invoices within their territory;
  • the second objection was a practical one — most businesses do not keep a record of the chargeable event and, indeed, in some cases it can be rather difficult to tie down; and
  • such a rule was potentially unworkable and would impose unnecessary additional burdens — by contrast, a rule based on the date of invoice could work, was practical and would not impose unnecessary additional burdens.

10.8  The Minister then reminds us, in relation to the aspect of the draft Directive enabling all Member States to offer the cash accounting scheme as an option for SMEs below a certain turnover threshold, that this is already applied in the UK (and some other Member States) by derogation and comments that it is important to UK SMEs that this continues.

10.9  Turning to the actual development of the negotiations on the proposed Directive the Minister tells us that:

  • initial discussions commenced under the Czech Presidency in the first half of 2009, based on the original Commission draft;
  • the Swedish Presidency continued the discussions during the second half of 2009, based on its compromise texts;
  • more recently the Spanish Presidency made the matter a VAT priority, produced a large number of texts and held many meetings in quick succession over recent weeks;
  • five such texts moved away from the Commission's proposal for facilitating the take-up of electronic invoicing, changed the approach to the obligation to invoices for exempt supplies and did not address the practical issues raised by UK business in relation to domestic invoices; and
  • from the Government's perspective, none of these texts were wholly acceptable, given the valid concerns UK business had raised.

10.10  The Minister says that the Government therefore continued to press for substantial improvements to the draft Directive and finally, on 12 March 2010, a sixth text emerged which:

  • retained, for electronic invoicing, the principles that the Commission aspired to and would enable businesses to be free to send electronic invoices under the same conditions as they would send paper invoices;
  • would therefore help provide the right sort of environment for greater take up of electronic invoicing in the future and potentially reduce business burdens across the EU;
  • included an option to enable a Member State to remove the obligation to issue VAT invoices for exempt supplies made in its territory;
  • introduced a mandatory provision to remove the obligation to issue VAT invoices in respect of cross border exempt finance and insurance supplies within the EU;
  • included the fraud provision, but without an impact on domestic treatment;
  • changed the rules for cross-border supplies so that they would be based on the date of invoice and thus more practical from a business perspective; and
  • provided the legal base for the Government to continue to operate the cash accounting scheme, once the UK's existing derogation runs out at the end of 2012.

10.11  The Minister then says that:

  • the Presidency presented this text of the draft Directive to the ECOFIN Council for agreement as a general approach;
  • the Council, on 16 March 2010, agreed the general approach, with inclusion in the text of a review clause which would require the Commission to assess (based on an independent economic study) the effectiveness of the new rules on electronic invoicing by 31 December 2016;
  • given that this text so closely reflected the Government's negotiation priorities and the very real risk that any further delay would potentially put hard won gains at risk, it accepted the general approach, as did all other Member States; and
  • following some final tidying up of the text, the Government expects the draft Directive to go forward to a future Council, possibly on 8 June 2010, for adoption.

10.12  The Minister encloses with his letter an impact assessment based on the most recent text of the draft Directive. This shows that there would be no additional costs for the Government or UK business and that UK business would benefit annually, over the first five years, from a reduced administrative burden worth between £0.9 million and £8.5 million.

10.13  Finally the Minister says:

"While it is regrettable that the scrutiny procedures were not completed I hope that you can understand why the UK accepted the general approach, given the circumstances."


10.14  We note that the text of this draft Directive, to which the Government has agreed, meets its own objectives and those of UK business and so we clear the document.

10.15  However, we are concerned about the clear breach of the scrutiny reserve resolution occasioned by the Government's participation in the general approach on the draft Directive. We note the Minister's account of the intensive discussions in the final stages of Council negotiations but find unacceptable both:

  • the lack of any indication that the Government's negotiators attempted to assert the parliamentary reserve; and
  • the unapologetic and rather throwaway comment of the Minister about non- completion of scrutiny procedures.

23   (30407) 5991/09: see HC 19-ix (2008-09), chapter 4 (4 March 2009). Back

24   (29570) 7688/08: see HC 16-xx (2007-08), chapter 5 (30 April 2008), HC 16-xxviii (2007-08), chapter 5 (22 July 2008) and HC 16-xxxi (2007-08), chapter 11 (15 October 2008). Back

25   Suppliers provide information in recapitulative statements about what they have supplied to whom in other Member States. In the UK they are known as EC Sales Lists. Back

26   The scheme enables SMEs to account for VAT on the basis of cash payments made or received, rather than on an invoice date basis. Back

27   (28040) 16810/06: see HC 41-ii (2006-07), chapter 17 (29 November 2006). Back

28   See headnote. Back

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