Legally and politically important
(a), (b) and (c): Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy & Industrial Strategy Committee and the Treasury Committee
(a) Proposal for a Council Directive on certain value added tax obligations for supplies of services and distance sales of goods; (b) Proposal for a Council Implementing Regulation laying down implementing measures for the common system of value added tax; (c) Proposal for a Council Regulation on administrative cooperation and combating fraud in the field of value added tax
(a) and (c) Article 113 TFEU, special legislative procedure; unanimity; (b) Article 397 of Council Directive 2006/112/EC; unanimity
(a) (38341), 14820/16 + ADDs 1–2, COM(16) 757; (b) (38342), 14821/16 + ADDs 1–2, COM(16) 756; (c) (38343), 14822/16 + ADDs 1–2, COM(16) 755
19.1In December 2016, the Commission tabled a package of legislative proposals to reform the EU’s VAT legislation, with the aim of reducing the extent to which differences in VAT law hinder the EU’s internal market for e-commerce, for both the supply of electronic services and the online sale of goods to consumers.
19.2These proposals, which are due to come into effect in two tranches in 2019 and 2021 respectively, would reduce businesses’ administrative burdens and simplify accounting for cross-border VAT. However, the draft legislation also drastically curtails firms’ ability to treat cross-border sales of goods within the EU as domestic transactions. In addition, the Commission proposed to abolish the existing VAT exemption for low-value parcels imported from non-EU countries. We have set out the substance of the Commission’s package of measures in more detail in paragraphs 19.20 to 19.23 below.
19.3As the package of measures concerns taxation, each Member State has a veto. In November 2017, the ECOFIN Council discussed a draft general approach on the legislation which preserved most of the substance of the original Commission proposals. The Financial Secretary to the Treasury (Mel Stride) wrote to us on 6 November with his assessment of the general approach, which he said offered “a reasonable compromise on previously outstanding issues”.
19.4Despite having persistently expressed concerns about some elements of the proposals that did not appear to have been addressed in the draft general approach, the Minister also requested a scrutiny waiver to enable him to support the Presidency’s text at the November Council meeting. In the event, the Council could not unanimously support the tabled text because of opposition from Germany. Finance Ministers are expected to discuss a revised compromise proposal by the Estonian Presidency in December 2017.
19.5We thank the Minister for his detailed update on the status of the negotiations within the Council before the ECOFIN meeting on 7 November. Given that the Presidency is expected to make further amendments to the proposals ahead of the December Council meeting, we retain the documents under scrutiny until we have received an update on any additional changes made compared to the text discussed in November.
19.6We were in any event somewhat surprised by the Government’s support for the legal texts, given that it does not appear that the concerns it has raised consistently since the proposals were tabled last year have been addressed. In particular, the abolition of the current distance selling threshold for goods and the removal of Low Value Consignment Relief, both of which the Financial Secretary had challenged, were both retained by the Council.
19.7In view of our detailed assessment of the state of play on these proposals as set out in paragraphs 19.37 to 19.49 below, we would like the Minister to clarify:
19.8We have also considered these proposals—and the application of the EU’s VAT rules to cross-border business-to-consumer sales of goods and services more generally—in the context of our withdrawal from the EU. The Financial Secretary to the Treasury has told us previously that the “future of VAT (…) is one of many complex issues that will be subject to Brexit negotiations”, and that it was “not possible to say at this stage” what the VAT position for UK businesses selling goods to EU-based consumers will be.
19.9The Government has been pushing for the Article 50 negotiations to proceed to discussions about the future UK-EU relationship, which should provide the “freest possible trade”. Moreover, it is clear the Government does not accept that Brexit will necessarily mean that VAT-related barriers that apply by default between the EU and other third countries (notably the requirement for VAT to be collected on importation into the EU before goods can be released for free circulation) will also apply to UK-EU trade after our withdrawal. It has repeatedly said that is not yet possible to say what the VAT position for UK businesses selling goods to EU-based consumers will be.
19.10In addition, the Prime Minister has called for a short-term interim arrangement after March 2019, during which the “current structure of EU rules and regulations would apply”, including a temporary UK-EU customs union. Although the Government has not said so explicitly, such an arrangement would, presumably, keep the UK in the EU’s common system of VAT for its duration. If not, VAT controls would be necessary at the border on goods flowing either way. We note in this respect that the Commission has recently tabled additional legislative proposals to remove more VAT-related barriers to the free flow of goods within the Single Market.
19.11In the absence of further detail on either the interim arrangement or the Government’s proposals for the new UK-EU economic framework, we are unable to assess whether these proposals will apply in the UK. Given these outstanding issues, on which we elaborate further in paragraphs 19.39 to 19.47 below, we have some further questions for the Minister about Brexit and VAT specifically:
19.12Following receipt of the Minister’s reply, we will consider lifting the scrutiny reserve ahead of formal adoption of the legislation by the Council in 2018. Given the implications of the VAT proposals for HM Revenue and Customs and UK businesses, we draw these developments to the attention of the Business, Energy & Industrial Strategy Committee and Treasury Committee. We will also return to the subject of VAT in a further Report on the Commission’s recent proposals on a “definitive VAT system”.
(a) Proposal for a Council Directive amending Directive 2006/112/EC and Directive 2009/132/EC as regards certain value added tax obligations for supplies of services and distance sales of goods: (38341), + ADDs 1–2, COM(16) 757; (b) Proposal for a Council Implementing Regulation amending Implementing Regulation (EU) No 282/2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax: (38342), + ADDs 1–2, COM(16) 756; (c) Proposal for a Council Regulation amending Regulation (EU) No 904/2010 on administrative cooperation and combating fraud in the field of value added tax: (38343), + ADDs 1–2, COM(16) 755.
19.13Directive 2006/112/EC establishes the EU’s common system of value added tax (VAT). Despite a significant level of harmonisation under the Directive, some complications persist. In particular, under certain conditions companies engaged in cross-border business within the EU may have to comply with VAT legislation of another Member State, with which they may not be familiar. In the context of the rapid increase in the online sale of goods and electronic services, the European Commission observed in its 2015 Digital Single Market Strategy that “the complications of having to deal with many different national systems represent a real obstacle for companies trying to trade cross-border both on and offline”.
19.14To address these barriers to cross-border trade in the e-commerce sector, the Commission in December 2016 published a package of legislative proposals. We assess these in more details below, after a brief description of the current application of EU VAT rules to the online supply of goods and electronic services across borders.
19.15A substantial segment of the e-commerce market is the supply of goods which have been purchased online, often through an electronic marketplace such as Amazon. Where an EU business sells goods to customers based in another Member State, and where the sale of goods to that particular country exceed a value of €35,000 in any given year, they must register for VAT in that country and comply with its domestic VAT legislation. If the annual value of the sales to a specific Member State does not meet its threshold, VAT can be accounted for in the country where the supplier is based.
19.16Aside from the online sale of goods, a significant segment of the e-commerce sector is focused on the supply of electronic services such as streaming or downloading of audio-visual content. In 2008, the Member States unanimously decided that business-to-consumer (B2C) supplies of such electronically-supplied services should be taxed in the Member State where customer is situated, rather than where the supplier is established (called the “destination principle”). This change, which came into effect on 1 January 2015, is in line with current VAT rules for the supply of services between businesses, but constitutes a derogation from the general rule for intra-EU B2C services which stipulates that VAT is levied in the home country of the supplier.
19.17The change to the destination principle for VAT on the cross-border supply electronic services was aimed at stemming national revenue losses resulting from businesses deliberately relocating to Member States with lower VAT rates for electronic services, and thus depriving other countries of tax revenues. The new system was also considered necessary because businesses that did not relocate were at a competitive disadvantage, as the differential in the relevant rates between the Member States could reach 24 per cent.
19.18The new system was accompanied by the establishment of a Mini One-Stop Shop (MOSS), which enables B2C suppliers of electronic services to fulfil their VAT obligations in their home Member State, including for services provided in other EU countries. This way, they do not need to register for VAT purposes in every Member State where they have customers. The relevant VAT revenue from these services is then transferred from the country where the supplier is located to that where the customer is situated. There is a MOSS scheme available for both EU-based suppliers (the Union scheme) and for suppliers established outside the EU (the non-Union scheme).
19.19In 2015, the Commission promised that it would present proposals for VAT reform to help businesses sell goods and services across the Single Market using digital channels. Following an in-depth review of the practical implementation of the VAT Directive, the Commission concluded that the existing rules present a number of obstacles to the supply of electronic services between Member States for both online selling of goods and the provision of electronic services:
19.20Based on its review, the European Commission presented a package of four legislative proposals in December 2016 to remove barriers posed by the EU VAT rules to the business-to-consumer (B2C) cross-border supply of goods and services within the EU. Collectively, they are referred to as the B2C E-Commerce Package. It complemented an earlier legislative proposal on the cross-border delivery of parcels, which we have considered separately.
19.21The previous Committee already cleared one of the proposals, which allowed Member States to reduce the rate of VAT they charge on electronic books, magazines and periodicals, from scrutiny. It retained the other three proposals, which deal with the administration of the VAT system rather than specific rates of tax, under scrutiny pending their consideration by the Council. These are:
19.22The Commission planned for its proposals to come into effect in two tranches in 2018 and 2021 respectively. Our predecessors described the impact of the proposals in some detail in their previous Report. In summary, the crux of the first tranche of the Commission proposals encompassed:
19.23The second tranche of more fundamental reforms would take effect from 2021. It includes:
19.24The then-Financial Secretary to the Treasury (Jane Ellison) submitted an Explanatory Memorandum on the entire package on 20 December 2016. She broadly welcomed the proposals despite a number of concerns (see below), and noted that despite the entry into force of the fundamental reforms in 2021 or later, “British-owned businesses operating within the EU” would be affected, as would British businesses selling into the EU post-Brexit. She concluded therefore that the Government had a “continued vested interest in ensuring that the system is as business-friendly as possible”.
19.25In the December 2016 Memorandum and in subsequent letters from the previous Financial Secretary and her successor (Mel Stride), the Government expressed a number of concerns about the proposals:
19.26In view of the Government’s misgivings about elements of the proposals, the previous Committee retained the proposals under scrutiny in January and April 2017.
19.27In April 2017, the then-Minister noted that the Council’s discussions on the proposals up until then had been “inconclusive”, reflecting “national concerns about assuring revenues and cultural attitudes to burdens on business”. The Minister added that the Commission had clarified that it intended to put forward a more detailed draft Council Implementing Regulation for the abolition of the relief, although several Member States had pushed for more clarity about the contents of such an instrument as part of the current discussions.
19.28On 24 October 2017, the new Financial Secretary wrote to us with further information about the state of play in the negotiations within the Council. He indicated that “agreement is near on all but one of these changes” due under the first tranche of the reforms, which the Commission had hoped to enforce from 2018. With respect to the second tranche, the Minister noted that “agreement has not yet been reached on the extension of MOSS to intra-community supplies of goods, as some Member States remain split over the proposed threshold” before VAT must be accounted for in the country of destination.
19.29Despite the Government’s concerns about certain elements of the proposals, and the need for unanimity within the Council to adopt the legislation, the Minister told the Committee that the Member States—including the UK—were expected to agree on a general approach tabled by the Estonian Presidency for the ECOFIN meeting on 7 November:
“Although these proposals are under scrutiny, the Government feels that it is important that Member States are able to send a clear commitment to further work to modernise the VAT system for the digital age. The Government would therefore, at this stage, like to request a scrutiny waiver allowing the UK to agree to a general approach on the proposals.”
19.30Due to the delays in the establishment of the Committee following the general election, we did not have an opportunity to consider the Minister’s request before the ECOFIN Council. In the event, EU Finance Ministers were unable to endorse the general approach due to opposition from the German delegation. However, as the text discussed is likely to form the basis for a second attempt to reach unanimity at the December ECOFIN Council, we have assessed its substance in more detail below.
19.31The Presidency’s draft general approach, which—as noted—was supported by 27 Member States, maintains the substance of the first tranche of reforms as proposed by the Commission (see paragraph 19.22 above), although the Council rejected the proposal to allow MOSS users to follow the record retention rules of the Member State of identification. To give national tax administrations more time to prepare, the date of implementation for this first tranche was also pushed back from January 2018 to January 2019.
19.32With respect to the second tranche of reforms, the Council also mostly maintained the Commission proposals, and their entry into force is still scheduled for January 2021. Principally, the draft general approach retained the removal of the current exemption from the destination principle for distance sales of goods below the annual value threshold of €35,000 or €100,000 per Member State, and replaced it with a new threshold for goods and electronic services of a cumulative €10,000 across all EU countries other than the supplier’s home Member State.
19.33In addition, the Presidency text supported the extension of the MOSS to third country firms selling goods worth €150 or less to EU-based consumers, and in parallel the existing system of Low Value Consignment Relief will be abolished. However, Member States did not support the possibility of third country firms using the MOSS if they are “duly authorised” by a Member State to do so; instead, they would either have to appoint an intermediary in the EU, or be established in a country with which the EU has an agreement on mutual assistance with respect to VAT. The Estonian Presidency noted in its report to the Council that one (unnamed) Member State had tabled a draft for an “alternative import scheme” in place of the proposals to abolish LVCR, but added that “pursuing this route would render it impossible to achieve the 2021 implementation date target”. As such, it was not included in the Council’s position.
19.34The draft general approach also made a substantial change to the Commission proposal with respect to online platforms and marketplaces such as Amazon and eBay. The Member States have introduced an amendment (as part of the 2021 tranche of reforms) which will make the market place the supplier, and therefore held liable for the VAT, where:
19.35The Estonian Presidency will re-draft the legal text with a view to reaching unanimity among all Member States at the ECOFIN Council on 5 December 2017. The European Parliament, which does not have co-decision powers over legislative proposals on taxation, is due to deliver its non-binding opinions on the package on 30 November.
19.36The European Commission will in 2018 table a proposal for further amendments to the Council Implementing Regulation on VAT to provide the necessary technical detail for the 2021 tranche of reforms, in particular with respect to the new requirements for online marketplaces and the abolition of LVCR.
19.37We consider the Minister’s indication of support for the draft general approach tabled for the November ECOFIN Council to be somewhat surprising, given that it does not appear that the concerns he and his predecessors have raised consistently since December last year have been addressed. In particular, the abolition of the current distance selling threshold for goods and the removal of Low Value Consignment Relief for low-value third-country imports have been retained in the general approach.
19.38The entry into force of these reforms in 2021, coupled with our scheduled withdrawal from the EU in March 2019, might explain why the Government did not prevent unanimity from being reached in support of the proposals. However, the continued ambiguity about the scope and implications of the Government’s “implementation period” for the immediate post-Brexit years means that we are unable to conclude definitively whether this new VAT legislation—including the 2021 tranche—will apply to the UK.
19.39We have also considered these proposals—and the application of the EU’s VAT rules to cross-border business-to-consumer sales of goods and services more generally—in the context of our withdrawal from the EU.
19.40The EU’s common system of value added tax aims to facilitate the free movement of goods and services, notably by removing the requirement for import VAT and the associated customs formalities. Outside of the Single Market and Customs Union, goods imported into the EU from the UK—including those bought directly by consumers from British e-commerce retailers—will have to be assessed for VAT, excise duty and customs duty. It follows that, notwithstanding any more favourable treatment laid down in a post-Brexit agreement, the UK’s exit from that common system is likely to create barriers to trade between the UK and the EU which are currently absent.
19.41In April 2017, after the Government had triggered Article 50, the former Financial Secretary told our predecessors that it was “too early to say what the nature of our relationship with the EU VAT system” might be, and what form of “fiscal frontier” might exist between the UK and the EU post-Brexit. In early July, her successor again stated that the “future of VAT (…) is one of many complex issues that will be subject to Brexit negotiations”, and that it was “not clear what the outcome of those negotiations might be”. Later that month, he reiterated that it was “not possible to say at this stage” what the VAT position for UK businesses selling goods to EU-based consumers will be.
19.42However, the Government has been openly pushing for the Article 50 negotiations to proceed to discussions about the future UK-EU relationship. In addition, the Prime Minister has called for a short-term interim arrangement during which the “current structure of EU rules and regulations would apply”, including a temporary UK-EU customs union. Although the Government has not said so explicitly, such an arrangement would, presumably, keep the UK in the EU’s common system of VAT for its duration. With respect to the long-term economic relationship, it is the Government’s position that there should be “the freest and most frictionless trade possible with the EU”, including in respect of VAT-related barriers that do not currently exist. As regards e-commerce specifically, the Government’s White Paper on Customs states the aim of ensuring that “[UK-EU] movement of goods as small parcels, via Royal Mail and fast parcel operators, continues to operate effectively”.
19.43It is clear from the Ministers’ letters to us on the e-commerce package that the Government does not accept that Brexit will necessarily mean that VAT-related barriers that apply by default between the EU and other third countries will also apply to UK-EU trade after our withdrawal. If it did, it could have clarified what the existing VAT rules mean once the UK leaves the Single Market and the Customs Union for the supply of goods and electronic services between the two sides by reference to the position of other third countries. Instead, it has repeatedly said that is not yet possible to say what the VAT position for UK businesses selling goods to EU-based consumers will be.
19.44While we support the Government’s ambitions to negotiate an agreement which maintains smooth trading conditions with the EU to the extent legally and politically possible (both in relation to VAT and other potential barriers), we are concerned that the Government has not provided any concrete proposals about how they can be achieved in practice. In tabsence of further detail on cross-border VAT issues post-Brexit, we have therefore also considered the implications of the UK being in the same position as any other third country with respect to distance sales of goods under the proposals under discussion:
19.45The precise impact of these potential changes on the UK’s e-commerce sector has not been quantified. The Minister has already emphasised that the volume of goods sold at distance by UK businesses to EU consumers is not known, because firms are not required to provide HMRC with information on the volume or value of goods they supply to customers in other Member States. The Treasury is “exploring alternative ways in which we could gather information to help inform work in this area”.
19.46All in all, there remain significant areas of uncertainty about the impact of the UK’s withdrawal from the EU’s common system of value added tax for both UK businesses and consumers. Given the status of the Article 50 negotiations and the lack of clarity from the Government about the way in which it intends to achieve “the freest trade possible” with the EU after Brexit, we cannot even reasonably determine whether the 2021 tranche of VAT reforms for the e-commerce sector, once approved by the Council, will apply to the UK. When we receive further information from the Minister we may revisit these conclusions.
154 The VAT-related barriers identified by the Commission are set out in more detail in paragraph 0.19 below.
155 The draft general approach can be found in .
156 See paragraphs 0.25. to 0.27 for more information on the Government’s position on the proposals.
157 (7 November 2017).
158 See paragraph 0.33.
159 from Mel Stride to Lord Boswell (21 July 2017).
160 See David Davis’s statement to the House of 17 October (): “Whilst we’ve made good progress, the remaining [withdrawal] issues in this sector are dependent on the future discussions on the future relationship, so we are ready and prepared to start those discussions.”
161 by the Prime Minister (Florence, 22 September 2017).
162 DExEU, ““ (15 August 2017).
163 See Commission document . The Committee will assess these proposals separately in a forthcoming Report.
164 , as amended.
165 Commission document COM(2015) 192. See also our predecessors’ .
166 In four Member States, including the UK, a higher threshold of €100,000 is applied before VAT must be paid in that country. See article 34 of .
167 For goods imported from a non-EU country, VAT is payable upon importation unless the value is €22 or less (see paragraph 0.9 and footnote 13 below).
168 See for more information article 5 of , and .
169 European Commission, “ “ (accessed 1 November 2017).
170 Commission Impact Assessment (), p. 73.
171 To cushion the fiscal impact on EU countries that will see a reduction in VAT revenue, the Member State where the supplier is based will retain a decreasing proportion of the VAT collected until 31st December 2018.
172 A non-EU taxable person (i.e. a company) which is registered for VAT purposes, or is required to be registered for VAT purposes in the EU but has no establishment there cannot use the non-Union scheme (because it is required to be identified for VAT purposes).
173 See for more details European Commission Staff Working Document .
174 €1 = £0.91973 or £1 = €1.08728 as at 1 September 2017.
175 Where a business sells goods to another Member State exceeding a value of €35,000 per year (or €100,000, depending on the Member State), they must register for VAT in that country and comply with its domestic VAT legislation. The legal and linguistic barriers this poses act as a disincentive. Conversely, the threshold gives traders based in Member States with lower VAT rates on specific goods a competitive advantage over traders based in countries with a higher VAT rate.
176 Goods imported from outside the EU which are priced at less than €22 (or €10 in some Member States) are exempt from VAT (see article 23 of ). In addition, the Commission has expressed concerns about deliberate abuse of the rules by suppliers based outside the EU, for example by under-declaring the value of shipments to avoid VAT or incorrectly classifying goods as consumer-to-consumer transactions (which are VAT exempt altogether). EU-based suppliers may also commit VAT fraud by falsely declaring the goods to have been imported from outside the EU.
177 Small businesses providing electronic services have to charge VAT to customers based in another Member State. However, they often struggle to prove the location of their customers, as EU law currently requires them to provide two pieces of evidence.
178 Identified complexities include requirements to issue invoices to consumers; audits by the tax authorities of the Member State(s) where the consumers, rather than the business, is located; and disproportional record-keeping requirements.
179 Cross-border B2B supply of goods within the EU are not currently subject to VAT. For the provision of B2B services, the receiving business would pay VAT at the applicable rate in their country using the .
180 See our predecessors’ . The proposal remains under scrutiny.
181 See our predecessors’ . The Maltese Presidency tabled a for the ECOFIN Council in June 2017, but Ministers were on a legislative text in view of the need for unanimity. It is unclear when the proposal will now be adopted.
182 As legislation related to taxation, they must be adopted by unanimity in the Council. The European Parliament can only deliver a non-binding opinion on the proposals.
183 See Twenty-Sixth Report HC 71–xxiv (2016–17), (18 January 2017).
184 See paragraph 0.5 on the “destination principle” for B2C supply of goods.
185 The simplification of the rules on record-keeping would initially only apply to the supply of electronic services, until the MOSS is extended to other goods and services in 2021 (see paragraph 0.22).
186 See articles 24b and 24f of . Currently, businesses can be required to provide two pieces of identifying information about the location of the customer, such as their billing address, their IP address or the location of their bank account.
187 Although the current threshold before the destination principle applies to distance sales of goods will be removed, the Commission has proposed a new threshold of €10 000, below which VAT obligations would remain in the Member State of establishment, that is, online cross-border sales would be treated as domestic sales.
188 See paragraph 0.22. The extension of the threshold will not apply to the supply of non-electronic services.
189 Council Regulation (EU) No 904/2010.
190 submitted by HM Treasury (20 December 2016).
191 See: from Jane Ellison to Sir William Cash (18 April 2017); from Mel Stride to Lord Boswell (3 July 2017); and from Mel Stride to Lord Boswell (21 July 2017).
192 from Jane Ellison to Lord Boswell (18 April 2017).
193 submitted by HM Treasury (20 December 2016).
194 from Mel Stride to Lord Boswell (3 July 2017).
195 See our predecessors’ .
196 See our predecessors’ .
197 from Mel Stride to the European Scrutiny Committee (24 October 2017).
198 The general approach is available in .
199 See paragraph 0.15.
200 Compare article 369m in the and in the .
201 See .
203 See recital 4 to Directive 2006/112/EC.
204 from Jane Ellison to Sir William Cash (18 April 2017).
205 from Mel Stride to Lord Boswell (3 July 2017).
206 from Mel Stride to Lord Boswell (21 July 2017).
207 See David Davis’s statement to the House of 17 October (): “Whilst we’ve made good progress, the remaining [withdrawal] issues in this sector are dependent on the future discussions on the future relationship, so we are ready and prepared to start those discussions.”
208 by the Prime Minister (Florence, 22 September 2017).
209 DExEU, ““ (15 August 2017).
210 to the House of Lords EU Committee Report on “Brexit—the options for trade” (February 2017).
211 Legally, the EU will not be able to reach such an agreement with the UK until it formally becomes a third country on 30 March 2019.
212 from Mel Stride to Lord Boswell (21 July 2017).
28 November 2017