Documents considered by the Committee on 9 February 2011 - European Scrutiny Committee Contents

16   Value added taxation



COM(10) 381

Draft Directive amending Directive 2008/9/EC laying down detailed rules for the refund of VAT, provided for in Directive 2006/112/EC, to taxable persons not established in the Member State of refund but established in another Member State

Legal baseArticle 113 TFEU; consultation; unanimity
DepartmentHM Treasury
Basis of considerationMinister's letter of 27 September 2010
Previous Committee ReportHC 428-i (2010-11), chapter xx (8 September 2010)
Discussed in CouncilSeptember 2010
Committee's assessmentPolitically important
Committee's decisionCleared


16.1  Under Council Directive 2008/9/EC, with effect from 1 January 2010, VAT registered taxpayers have until 30 September of the calendar year following the refund period to submit their VAT refund claims. This means, for example, that businesses had until 30 September 2010 to submit any VAT refund claims in respect of the 2009 calendar year. Under the previous paper-based EU VAT refund system, businesses only had a six-month period to submit their refund claims, so the new arrangements are relatively generous and business-friendly. However, although Member States tax authorities were meant to have their electronic VAT refund portals up and running from 1 January 2010, a small number did not do so until mid-May 2010.

16.2  Council Directive 2008/9/EC specifies in some detail the core common data fields that must be included on each Member State web-based portal. However, Member States have had divergent views about the detailed design of their own portals. Some businesses have contended that the different approaches adopted by tax administrations make it difficult for them to submit claims in several Member States.

16.3  Given the delay in some Member States in setting up electronic VAT refund portals the Commission presented this draft Directive in July 2010 to ensure that EU businesses in all Member States could obtain their VAT refunds by allowing an exceptional six-month extension for the first year, that is from 30 September 2010 until 31 March 2011.

16.4  The Commission suggested also, in the draft Directive, that Member States harmonise some features of their national VAT refund web portals to make them more inter-operable and accessible for taxpayers. It proposed, subject to the opinion of the EU Standing Committee for Administrative Cooperation, it be granted the power to adopt and implement a more fully harmonized EU system.

16.5  When we considered this proposal in September 2010 the Government told us that although at first sight the draft Directive seemed sensible and reasonable, the impact and consequences were not straightforward and the Government had concerns about both aspects of the proposal. As to the proposed extension of the deadline for making claims:

  • any extension would entail costly IT system changes for HMRC and VAT refund agents;
  • it would create operational problems for HMRC, as it had deployed additional resources to deal with the anticipated surge in refund claims ahead of the September 2010 deadline;
  • it would create confusion for EU businesses as it was very unlikely that any Member State would be able to change their IT systems to accept late claims before the 30 September 2010 deadline expired;
  • although the Commission had provided some background information in its explanatory memorandum on the proposal there was no detailed analysis or supporting evidence; and
  • the Government had concerns that the proposed deadline extension had not been fully thought through and that it was a superficial knee-jerk response to lobbying by a small number of EU businesses.

We were told also that the proposed extension to the deadline would impose additional IT system change costs on HMRC of between £100,000 and £150,000 (and could not be implemented in time) and that it would impose un-quantified costs on VAT refund agents.

16.6  As regards the Commission's proposal that it be granted additional powers to develop and implement a fully harmonised pan-EU VAT refund system, we heard that:

  • the Government questioned whether this was either necessary or appropriate;
  • it had recently implemented a new web-based portal in accordance with core requirements agreed by the Commission and the adoption of new, revised requirements would require costly amendment of the UK's IT system; and
  • as the Commission's explanatory memorandum lacked detailed analysis or supporting evidence, it would be inappropriate to agree to what had been proposed.

16.7  Finally we were told that:

  • the proposal did not currently feature on any advance ECOFIN Council agenda, although it would need to be adopted before the end of September 2010, when the current deadline expired;
  • given that the first Council working group discussion on this proposal would not take place until 20 September 2010 the timetable was unrealistic; and
  • time would also need to be factored in for consultation with the European Parliament and the Economic and Social Committee.

16.8  We agreed with the Government that this proposal seemed ill-considered and inappropriate and noted the unrealistic timetable. We asked to hear, before considering the matter further, how Council consideration of the proposal was developing. Meanwhile the document remained under scrutiny.

The Minister's letter

16.9  In his letter, of 27 September 2010, which we did not receive until 28 January 2011, the Economic Secretary to the Treasury (Mr David Gauke) said that:

  • the proposal was first discussed at a Council working group on 20 September 2010;
  • at that meeting the Government challenged the Commission about the appropriateness of the proposals;
  • with regard to the proposed extension to the deadline, the Commission referred in general terms to the problems which businesses across the EU were having submitting their VAT refund claims and insisted that action here was necessary;
  • in response, all Member States except the UK were willing to accept an extension to the deadline;
  • the Government entered both a policy and parliamentary scrutiny reservation;
  • as regards the second element of the proposal, several Member States joined the UK in challenging the need for the Commission to be given additional (unspecified) powers to further harmonise the functioning of Member States' VAT refund systems;
  • as a result, the Presidency concluded that this element of the proposal would need to be discussed further at the next EU Standing Committee on Administrative Co-operation meeting on 11 October 2010;
  • however, given the deadline for businesses to submit 2009 VAT refund claims was 30 September 2010, the Presidency concluded that there was an urgent need to come to a conclusion on the proposed extension to that deadline; and
  • it had therefore decided to take that element to COREPER on 29 September 2010 (the European Parliament was expected to deliver a favourable opinion on the extension by then) to seek general agreement — the extension would then go to a future Council meeting for final adoption.

16.10  The Minister continued that:

  • in the light of the working group discussion, HMRCs most recent experience with claims submitted by UK businesses to two Member States and representations from businesses, there was a far stronger case for the deadline extension than appeared to be the case before;
  • there were clearly problems with a number of VAT refund web portals — all EU businesses (including UK businesses) were having difficulties making claims to two particular Member States as a result of technical issues at their end;
  • EU businesses (but not UK ones) were highlighting problems with at least nine other Member States too;
  • there had been a general expectation within the EU business community (largely as a result of a Commission Press Release at the time the proposal emerged) that the extension would be granted and many EU (and UK) businesses had therefore held off putting in their refund claims;
  • it was now apparent that an extension of the deadline for making claims would not in fact entail costly IT system changes for HMRC or for VAT refund agents;
  • given these circumstances, the Government now accepted that an extension of the deadline would be the most desirable outcome and businesses across the EU needed to be given a clear signal about this before 30 September 2010; and
  • the Government was therefore now willing to agree to this aspect of the proposal and would indicate that at the COREPER meeting on 29 September.

The Minister concluded that:

  • any other approach would create uncertainty and potentially deny many businesses their legitimate rights to be able to submit VAT refund claims; and
  • he regretted that the scrutiny process could not be completed but hoped that we would understand the reasons behind the Government's decision.


16.11  If we had received this letter in a timely manner we would, given the new information given in it, have cleared the proposal from scrutiny, which we now do. And in the circumstances we would have accepted the Minister's justification for the breach of scrutiny.

16.12  However, it is most regrettable that we did not receive the Minister's letter until very recently, and then only when it was realised that final consideration of the proposal remained outstanding. This incident appears to have resulted in a breakdown in the Treasury machinery and we look to the Minister to ensure that this sort of mistake does not reoccur.

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