Documents considered by the Committee on 19 January 2011 - European Scrutiny Committee Contents

7 Value added taxation



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COM(10) 695

Green Paper on the future of VAT: Towards a simpler, more robust and efficient VAT system

Legal base
Document originated1 December 2010
Deposited in Parliament10 December 2010
DepartmentHM Treasury
Basis of considerationEM of 20 December 2010
Previous Committee ReportNone
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionNot cleared, further information requested


7.1 For over 40 years the EU, and its predecessors, has had a common system of value added taxation, governed principally by the VAT Directive, the latest version of which is Council Directive 2006/112/EC.

The document

7.2 The Commission's intention with this Green Paper and an accompanying Staff Working Document, which supplements the former through a series of individual topic papers, is to launch a broad consultation on the functioning of the current VAT system and how it should be reframed in the future. The consultation, which is open to anyone with an interest, will run through to the end of May 2011. The outcome will help inform the production of a new VAT strategy, which the Commission expects to publish as a Communication by the end of 2011.

7.3 The purpose of the Communication will be to identify actions or initiatives to reform the current VAT system with a view to reducing administrative burdens, to combating fraud and to modernisation and simplification. It will effectively set out the Commission's high-level work plan over the medium term and give an indication of the nature of the VAT proposals to be expected in the coming years.

7.4 In its introduction to the Green Paper the Commission sets out the background and concludes it is now time to have a critical look at the VAT system to:

  • strengthen its coherence with the single market;
  • strengthen its capacity as a revenue raiser by improving economic efficiency and robustness; and
  • reduce the cost of compliance and of collection.

The Green Paper and the Staff Working Document together raise a number of key issues, divided between two major headings. The first is on the principles of taxation of intra-EU transactions on which a VAT system fully adapted to the single market should be based. The second concerns issues which, in the Commission's view, need attention irrespective of the outcome of the debate on the principles.

7.5 The first of the two major headings essentially concerns the VAT treatment of cross-border transactions in the single market. The Commission considers a number of key principles in broad terms, including whether to implement definitive arrangements based on taxation at origin and the alternative route of taxation in the Member State of destination. One of the specific aims behind any reform would be to counter Missing Trader Intra-Community fraud. The Commission also raises the question of whether domestic and cross-border treatment needs to be equal and, if not, to what extent a different treatment is acceptable without it being an obstacle to the smooth functioning of the single market or allowing fraud. For example, it raises the possibility of achieving equal treatment through the general use of the 'reverse charge' mechanism.[35] At the same time the Commission recognises the difficulties associated with such an approach, so it reiterates its willingness to consider a pilot project to test the introduction of a compulsory generalised reverse charge system. Alternatively, the Commission suggests that equal treatment could be achieved through the taxation of intra-EU supplies of goods and services, but recognises that such an approach would have consequences for businesses and for tax administrations. The Commission suggests that technological solutions, including the VAT One-Stop-Shop (a simplification mechanism for cross border registration and declarations), offer possibilities to minimise impacts as part of any reform.

7.6 On the matters that the Commission considers need attention irrespective of the outcome of the debate on the first set of issues, the Green Paper raises the possibility for further work on the current VAT rules, with a view to ensuring the neutrality of the VAT system. It looks in particular at:

  • the scope of VAT, including the treatment of public bodies and of holding companies;
  • reducing VAT exemptions;
  • improving the VAT deduction system; and
  • further work on international services, including enforcing compliance by non-EU suppliers.

Other ideas focus on further work on the current process and procedures and VAT rules. The Commission points out that work in these areas would have to take into account the extent to which harmonisation is needed to improve the functioning of the single market and reduce compliance costs for business on the one hand and a degree of flexibility for Member States on the other. The areas flagged up are:

  • the legal process and the possible use of Council Regulations and Commission Decisions;
  • accelerating the current derogation process for urgent anti-fraud measures; and
  • VAT rates — including whether reduced rates are still relevant.

Finally, the Commission opens up possible areas for debate on broad themes aimed at reducing red tape, looking in particular at:

  • reducing administrative burdens and streamlining EU VAT obligations, for example by devising a standard EU VAT return or defining at EU level a maximum set of standardised VAT obligations, to make things easier for businesses involved in cross-border trade;
  • simplifications for small and medium enterprises, looking at the provision of an EU-wide scheme with a common registration threshold and greater scope for reducing compliance costs;
  • developing further the VAT One-Stop-Shop concept;
  • improving the VAT system for large and pan-EU businesses, for example looking at the treatment of interrelated companies, branches and VAT groupings;
  • looking for synergies with other legislation, for example simplifying VAT collection on import in line with centralised customs clearance; and
  • making the current system more robust — both in terms of countering fraud, but also to reflect changes in business practices since the basic system was established, including ideas to improve and simplify the collection of VAT by means of modern technologies and/or through financial intermediaries.

7.7 The Commission leaves it to contributors to the consultation process to decide on whether to focus on issues on which they have a particular interest or concern or instead cover the wide range of issues and 33 specific questions posed by the Commission in the Green Paper.

The Government's view

7.8 The Exchequer Secretary to the Treasury (Mr David Gauke) says that the Government welcomes the production by the Commission of the Green Paper and accompanying Staff Working Document and the opportunity to begin a high level debate on key issues and principles in order to inform the future direction of the EU VAT system. He comments further that:

  • the Government is also supportive of the broad aims of reducing administrative burdens; combating fraud; and modernisation and simplification; but
  • it will counter unhelpful ideas, including for example those that might lead to an erosion of UK national sovereignty or result in tax matters being dealt with otherwise than in Council under a unanimity basis.


7.9 Clearly the Communication on a new VAT strategy, which the Commission intends to follow on from the consultation launched by this Green Paper, will be important. So before considering the Green Paper further we should like to see in due course the response to it, which we presume the Government will be making.

35   The reverse charge mechanism makes the buyer, rather than the seller, liable for payment of VAT. Back

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