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
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Legal base |
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Document originated | 1 December 2010
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Deposited in Parliament | 10 December 2010
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Department | HM Treasury
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Basis of consideration | EM of 20 December 2010
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Previous Committee Report | None
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Discussion in Council | None planned
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Committee's assessment | Politically important
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Committee's decision | Not cleared, further information requested
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Background
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.
Conclusion
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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