Documents considered by the Committee on 6 December 2017 Contents

9Single EU VAT Area

Committee’s assessment

Legally and politically important

Committee’s decision

(a) and (b) Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy & Industrial Strategy Committee; the Northern Ireland Affairs Committee, and the Treasury Committees; (c) and (d) Cleared from scrutiny

Document details

(a) Proposal for a Council Directive harmonising and simplifying certain rules in the value added tax system and introducing the definitive system for the taxation of trade between Member States; (b) Proposal for a Council Regulation as regards the certified taxable person; (c) Proposal for a Council Implementing Regulation as regards certain exemptions for intra-Community transactions; (d) Communication from the Commission on the follow-up to the “Action Plan on VAT -Towards a single EU VAT area”.

Legal base

(a) and (b): Article 113 TFEU; special legislative procedure; unanimity; (c) Article 397 of Council Directive 2006/112/EC; (d)—



Document Numbers

(a) (39085), 12882/17 + ADD1–2, COM(2017) 569; (b) (39083), 12880/17, COM(2017) 567; (c) (39084), 12881/17, COM(2017) 568; (d) (39077), 12617/17, COM(2017) 566

Summary and Committee’s conclusions

9.1Since 1993, with the complete abolition of intra-EU customs controls as part of the Single Market, the EU has operated a curious system of Value Added Tax (VAT) on cross-border business-to-business (B2B) sales of goods and services within the EU. Under this system, a supplier can make a sale to a customer in another EU country VAT-free, after which the customer effectively must charge VAT to himself and pay it to their national tax authority. However, the system was meant to operate only on a transitional basis, as it allows for substantial amounts of VAT to be fraudulently evaded. For imports into the EU from non-EU countries (including from the UK when it leaves the EU after Brexit), VAT must still be paid at the border before it can enter the EU’s territory.

9.2In October 2017, the European Commission tabled a legislative proposal to simplify the system, end its transitional status and tackle intra-EU VAT fraud, estimated to cost Governments up to €53 billion (£47 billion)59 each year. In particular, it wants to make suppliers, and not buyers, responsible for VAT on cross-border purchases and expand the use of an EU-wide mechanism that allows suppliers to pay VAT on sales to any Member State in their own country. Simultaneously, it wants to mitigate any new burdens on suppliers by maintaining the current system where the buyer is considered a “reliable taxpayer”. The Commission estimates that its plans, if adopted by the Member States, would result in a reduction in VAT fraud of €41 billion (£37 billion) and compliance costs for businesses by €1 billion (£890 million) annually.

9.3At present, the Commission has only proposed to establish, in EU law, the intention to move to a new system of cross-border VAT for B2B sales, with further detailed draft legislation to follow in 2018. Initially, the new system would apply only to cross-border sales of goods, with its extension to supplies of services to follow after an evaluation. In the meantime, the Commission has also proposed, at the request of the Member State, several “Quick Fixes” to the current VAT system for cross-border sales of goods, to reduce burdens on businesses and to counter fraud.

9.4We have set out the history of the current intra-EU VAT system, the implications of the Commission proposals, and the substance of the short-term “Quick Fixes”, in more detail in “Background” below.

9.5On 24 October, the Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the proposals.60 He cautiously welcomes the proposals, but warns that further detailed consideration will be necessary. In particular, he highlights the creation of a parallel system depending on whether the buyer is a “reliable taxpayer” or not; the potential impact of changes to cash flow that both tax authorities and businesses may experience as a result of the proposed changes; and the need for further scrutiny to ascertain what new opportunities for VAT fraud the proposals might create. The Minister does not assess the implications for UK businesses, both buyers and suppliers, of leaving the EU’s common system of VAT.

9.6The Commission proposals are a major development in the EU’s common system of value added tax, as they are the first significant step in ending a system for cross-border VAT within the EU that was introduced nearly twenty-five years ago as a temporary measure.

9.7We share the Minister’s concern about requiring suppliers to deal with two parallel systems for VAT on cross-border sales, depending on the customer. In addition, our ability to effectively scrutinise what is being proposed is hampered by the fact the UK’s place within the common system of VAT after March 2019 remains unclear (see below), and because the actual substance of the Commission’s proposals will not follow until next year.

9.8We therefore ask the Minister to keep us informed of progress in the deliberations within the Council on these important proposals. In particular, we are interested in:

Implications of Brexit

9.9We have also considered these proposals, and the EU’s common system of VAT more broadly, in the context of the UK’s withdrawal from the EU. Our starting point must be that, at present, there are no customs and VAT controls at either the UK or EU border on flows of goods between the two, as they are both part of a common jurisdiction on these matters under the Treaties.

9.10With respect to this latest package of measures on VAT, these only concern intra-EU supplies of goods. As such, it does not appear they will have much significance for the UK once it is outside the EU’s common system of value added tax. However, it is unclear whether the Government envisages the UK will stay in that system for the duration of the post-Brexit “implementation/transition period”. We will therefore apply scrutiny under the presumption that the UK could be under a legal obligation to implement this new legislation, depending on the speed of its adoption and the length of the implementation/transitional period.

9.11However, it is clear that any post-Brexit interim arrangement will only postpone rather than negate the “cliff edge” of the UK becoming a “third country” vis-à-vis the European Union. At that point, UK exports to the EU (like those from any other non-EU country)61 will face customs and VAT controls which are currently absent, and the relevant duties and taxes will have to be paid by the importer before UK goods can be released into the EU.

9.12Therefore, unless there is an unprecedented agreement to the contrary, VAT controls will also at some point become necessary at the border between Northern Ireland and Ireland. The Government has said that it will not accept any physical infrastructure at the border. However, it is not clear how waiving border controls in Ireland only would be consistent with the UK’s obligations under the WTO’s Most Favoured Nation principle.62 Moreover, without the necessary infrastructure for VAT controls, it is not immediately apparent to us how the Government would collect domestic import VAT on goods coming into the UK from Ireland (whether the supplier is EU-based or not). By default, Brexit means the UK ceases to be part of the EU VIES system63 which alerts the tax authorities of the buyer to intra-EU supplies on which VAT is due. No non-EU country receives information via that system.64

9.13With neither a UK-EU VAT Information Exchange System nor border controls in place, there would be a widespread potential for VAT evasion, as the Government would not know about the importation of goods on which the tax had not yet been paid. The same applies where goods are bought by EU-based suppliers from the UK, and entering free circulation in the EU after passing the Irish border.

9.14The Irish Government will be unable to unilaterally waive VAT and other EU border-related controls on goods entering Ireland from the UK, unless some form of derogation from Ireland’s EU treaty obligation is negotiated and agreed by the other Member States. However, it is not clear to us if it is feasible for the Government to negotiate a replication of the VIES system for UK-EU trade only, so as to permit a continued absence of VAT controls at the Irish border. Even goods from the EFTA-EEA countries Norway, Iceland and Liechtenstein, which have the closest economic link to the EU without being a Member State, face customs and VAT controls.

9.15Moreover, even if such a system could be negotiated and implemented in time, it would require the UK and the EU to adhere to a similar set of rules on cross-border VAT (for example in relation to the legal definition of the “place of supply”, as well as the use of any reverse charge mechanism and of the One Stop Shop). We have not seen any concrete information about how such a joint system would operate in practice outside of the framework of the EU Treaties. We are concerned it would simply require the UK to accept the relevant EU legislation, without representation (and its current veto on tax matters) on the Council.

9.16Therefore, in the absence of a detailed proposal by the Government to facilitate an agreement to the contrary, we must assume that VAT controls will eventually be imposed on UK exports to the EU (irrespective of whether the Government chooses not to impose such controls on exports to the UK via Ireland, bearing in mind the potential consequences of such a decision under the MFN principle).

9.17We have set out our assessment of the VAT-related implications of Brexit in more detail in paragraphs 9.70 to 9.81 below. In light of this, we ask the Minister to set out in more detail the Government’s proposals to mitigate the impact of any VAT controls on exports to the EU after Brexit (especially at the Irish border), and to clarify:

9.18In anticipation of the Minister’s reply to our questions, we retain the proposal for a Council Directive and the Council Regulation on the Certified Taxable Person (documents A and B) under scrutiny, and clear the proposed Council Implementing Regulation and the accompanying Communication (documents C and D). We also draw these developments to the attention of the Business, Energy & Industrial Strategy and the Treasury Committees, and in the context of the border question in particular, the Northern Ireland Affairs Committee.

Full details of the documents

(a) Proposal for a Council Directive amending Directive 2006/112/EC as regards harmonising and simplifying certain rules in the value added tax system and introducing the definitive system for the taxation of trade between Member States: (39085), 12882/17 + ADDs 1–2, COM(2017) 569; (b) Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards the certified taxable person: (39083), 12880/17, COM(2017) 567; (c) Proposal for a Council Implementing Regulation amending Implementing Regulation (EU) No 282/2011 as regards certain exemptions for intra-Community transactions: (39084), 12881/17, COM(2017) 568; (d) Communication from the Commission on the follow-up to the “Action Plan on VAT -Towards a single EU VAT area”: (39077), 12617/17, COM(2017) 566.


9.19The EU has established a common system of value added tax (VAT) system which is currently governed primarily by Directive 2006/112/EC (the VAT Directive). For cross-border trade within the EU, VAT must be paid in the Member State where a goods or service is supplied, which ordinarily means in the country where the customer is based or takes possession of the goods.65 The Directive however contains various exemptions to this general principle, for example, where services are supplied to a consumer (in which case VAT is normally paid in the Member State of the supplier irrespective of the location of the customer).

9.20The current system, described in more detail below, was originally created in 1993 as a transitional measure following the creation of the Single Market. For cross-border business-to-business (B2B) transactions, which constitute the vast majority of all cross-border VAT-taxable sales in the EU, the tax must be paid in the country of destination, but by the buyer rather than the seller (in contrast to purely domestic transactions, where the seller is responsible for accounting for the VAT).

9.21The European Commission has now proposed to move towards a “definitive system of value added tax” within the EU, based on the principle that VAT should be paid in the Member State of destination for goods and services by the supplier, to bring the intra-EU system in line with the way VAT is collected on domestic transactions. The proposals do not affect the VAT treatment of goods imported into the EU from outside the Union, for example from the UK after Brexit.66

The current system for cross-border VAT within the EU

9.22Under the 1977 VAT Directive, value added tax on cross-border supplies of goods within the European Community was subject to a system of “de-tax and re-tax”, also known as the “destination principle”. Under this system, the exporter obtained a rebate for all VAT paid on its inputs from its national tax authorities, while the importer paid VAT at the applicable rate in their Member State. This system was largely the result of the persistent differences in national VAT rates. In this way, the destination principle prevented goods imported from another European Community country from benefiting from a lower rate of VAT than applicable to domestic supplies of the same good.67

9.23Before the advent of the Single Market, Member States’ customs authorities were crucial to the functioning of the system, as the goods had to be presented for inspection at the border of the exporting nation before they would authorise the VAT rebate to be paid to the supplier.68 However, with the abolition of internal customs controls between EU Member States as part of the introduction of the Single Market on 1 January 1993, the paying of the rebate to an exporter could no longer be made subject to a physical inspection of their paperwork at the border.

9.24In anticipation of this change, the Commission made a proposal for a new VAT system based on the “origin principle” in 1987, meaning that VAT would have to be accounted for in the country where the goods are when transport to another Member State begins or the sale is made, and then passed on to the Member State of consumption. Its key features were a harmonised tax structure with two rates of VAT; harmonisation, within two defined bands, of the rates applied by Member States; and a clearing mechanism for redistributing VAT receipts to the Member State where consumption took place.69

9.25The Council could not reach agreement on these proposals, resisting the clearing mechanism for redistribution of VAT receipts, as well as the harmonisation of VAT rates. The Member States therefore decided to adopt transitional arrangements which allowed tax to continue to be collected in the Member State of destination of the goods at the rate and under the conditions of that country. As a simplification, however, VAT had to be accounted for by the business buying the goods, to avoid the supplier having to comply with the VAT legislation of another Member State.70

9.26The functioning of the destination principle, in the absence of intra-EU border controls and with responsibility to account for the tax lying with the buyer, means that cross-border intra-EU B2B transactions are split into a zero-rated, VAT-free cross-border supply (by the seller) and a fictional VAT-taxable cross-border acquisition (by the buyer, who effectively has to charge himself VAT).71 To enable Member States to track cross-border supplies of goods in the absence of border controls, the VAT Directive requires suppliers to submit a monthly recapitulative statement via the VAT Information Exchange System (VIES),72 showing intra-EU supplies made, including the VAT number of the buyer. However, under the case law of the Court of Justice, the zero-rate exemption of an intra-EU supply of goods cannot be refused solely because of the absence of a valid VAT identification number of the customer.73

9.27The European Commission has therefore compared the current arrangement to a “customs system [which] lacks equivalent controls”, generating new opportunities for VAT evasion. In particular, the ability to zero-rate a transaction based on the claim that the goods are being exported to another EU Member State, without the inspection at the border and coupled with the deficiencies of the VIES system, increased the opportunities for missing trader fraud and carousel fraud.74

9.28For trade in goods with non-EU countries, the pre-1993 system of payment of VAT at the border still applies as such imports are not exempt from customs controls. This is clearly highly relevant in the context of the UK’s withdrawal from the EU, and its future status of “third country” vis-à-vis the EU.

Efforts to reform the cross-border VAT system

9.29The current system for cross-border taxation of the supply of goods was meant to be transitional. The Commission was initially supposed to present proposals for the “definitive VAT system”, based on the origin principle,75 by the end of 1994 for entry into force in 1997.76 However, the proposals put forward by the Commission in the mid-1990s were not accepted by the Member States,77 and the fundamental question about the application of either the origin or destination principle remained unresolved, including when the VAT Directive was recast in 2006.78

9.30To break the deadlock, in 2010 the Commission published a Green Paper on reform of the EU’s VAT system.79 In light of the responses received, the Commission issued a follow-up policy paper in 2011 on the “future of VAT”, in which it concluded that efforts to underpin the EU’s VAT system with the origin principle, as called for in the original 1967 VAT Directive, remained “politically unachievable”.80 It therefore announced it would “launch substantial efforts to devise alternative concepts for a properly functioning destination-based EU system of VAT”, and make proposals to that effect “in the first half of 2014”. In 2012, EU Finance Ministers unanimously expressed their support for a move to such a system.81

9.31After further delays,82 the European Commission published a new Action Plan on VAT in April 2016.83 It concluded that the VAT system ought to be simplified and made more efficient; provide fewer opportunities for fraud; and rely on greater cross-border cooperation between tax administrations. To achieve these goals, the Commission reiterated its intention to publish legislative proposals for the introduction of a “definitive VAT system” for intra-EU cross-border trade based on the principle of taxation in the Member State of destination, at the first instance for trade in goods (the “first legislative step”) and subsequently for services as well (the “second legislative step”, ending the use of the reverse charge procedure for such supplies).84

9.32The Commission concluded that that best option was to tax cross-border B2B supplies of goods within the EU in the same way as domestic supplies, meaning that suppliers should account for VAT in the Member State of destination.85 It would end the zero rating of cross-border supplies which gives rise to missing trader fraud, as the supplier would have to account for the VAT for one taxable event, and no zero-rated supplies would be allowed.

9.33EU Finance Ministers welcomed the VAT Action Plan in May 2016, but underlined that the thrust of the forthcoming Commission proposals was only one among various options available for reform of the VAT system.86 In addition, in November that year, the Council invited87 the Commission to also bring forward short-term fixes to the common system of VAT while this “definitive new VAT system” is being negotiated, relating to the use of the VAT identification number, chain transactions and call-off stock.88

The Commission proposals

9.34In October 2017, the Commission published three proposals to begin implementation of the “first legislative step” to formalise the use of the destination principle for cross-border sales of goods. These documents also contain four “Quick Fixes” to address known shortcomings of the VAT Directive in the short-term, while the new “definitive” system is put in place.

9.35This package of measures consists of:

Reinforcing the destination principle

9.36The core of the Commission’s proposals is document (A), which would establish, within the VAT Directive, the intention that the EU will replace the current system with “definitive arrangements based on the principle of taxation in the Member State of destination of the supply of goods or services”, where liability to account for the VAT would rest with the supplier. Under this new system, cross-border sales would no longer be split into a non-taxed “supply” and a taxed “transaction”. Instead, the concept of an “intra-Union supply” will be introduced as a single, taxable event.

9.37It is important to note that the amendment proposed to the VAT Directive by the Commission in October 2017 would only set down the principle that VAT should be accounted for in the Member State of the buyer. As and when the Member States agree to establish this principle in law the Commission would table a proposal to “overhaul the whole VAT Directive”. This further proposal, which the Commission hopes to put forward in 2018 for consideration by the Council, would apply only to sales of goods; a review will be published five years after entry into force of the new system, to help the Member States decide whether to extend it to the cross-border supply of services as well.

9.38The Explanatory Memorandum for the proposed amendment to the VAT Directive and the Communication accompanying the Commission proposal (document (D))92 set out, at high-level, how this new “definitive system” is envisaged to work in practice.

The One Stop Shop

9.39Firstly, to assist suppliers in accounting for VAT in Member States other than where they are based, they will be able to account for VAT for sales in any Member States through an extended One Stop Shop (OSS) via their national tax authority. This system would allow businesses to identify and account for VAT in their home Member State for all their sales in the EU, using the applicable VAT rate in the Member State of destination. Money paid to that Member State for sales in other EU countries is subsequently re-distributed to the relevant tax authority.93

9.40As part of its extension to cross-border B2B supplies, the Commission foresees that the functionality of the OSS will be expanded to enable suppliers to use it to deduct their input VAT from the tax they have collected on sales rather than via a domestic VAT return.

Mutual assistance and cooperation

9.41Secondly, the Commission recognises that increased use of the One Stop Shop would require more trust and cooperation between tax administrations, as the Member State where the goods arrive would have to rely, for the first time, on the Member State of departure to collect the VAT due on the cross-border supply, and redistribute it accordingly.94 It has therefore also tabled separate proposals to increase statutory cooperation between the EU’s tax authorities,95 although the specific legislation on the functioning of the One Stop Shop under this new system will only be presented as the package of detailed measures in 2018.

Transitional measures and the “Certified Taxable Person”

9.42Thirdly, the Commission proposes to mitigate the administrative impact of these changes on businesses, in particular the shift of liability for VAT from the buyer to the supplier in cross-border sales.

9.43Notably, it seeks to introduce the legal concept of a “Certified Taxable Person” (CTP), in essence a business certified as a reliable taxpayer by their national tax authority (documents (A) and (B)). Such certification would be mutually recognised by all EU countries, and once granted would be entered into the VAT Information Exchange System so that traders across the EU could quickly verify whether a buyer or supplier is a CTP. In the context of the transition to the “definitive system” of VAT, where a buyer has CTP status, they would remain liable to account for VAT under a reverse charge mechanism, in derogation from the proposed principle that the supplier should have that responsibility.

9.44The justification for continuing to place responsibility for VAT on the buyer, derogating from the new “definitive” cross-border VAT system, is that it would mitigate the initial impact on suppliers of having to account for the tax on cross-border sales, while limiting missing trader or carousel fraud because the goods would be supplied to a CTP, who would be “by definition (…) a reliable taxpayer”. In these cases, there is no essential change in the way the VAT system works for cross-border supplies compared to the current situation. Depending on the status of their customers, suppliers would therefore need to administer two different systems to account for VAT on intra-EU supplies. It is unclear if the use of the CTP status in this way is meant to be transitional, or permanent.

Further simplification measures

9.45Lastly, the Commission floats suggestions for future simplifications of the cross-border VAT system, for example through the abolition of the recapitulative statement of intra-EU supplies (the VIES listing) and new streamlined invoicing rules for cross-border supplies. It remains to be seen whether these will be taken forward in its detailed proposals in 2018.

Estimated impact of the proposals

9.46In its impact assessment, the European Commission estimates that this new system for VAT on cross-border sales of goods could reduce annual volumes of missing trade fraud by €41 billion (£36 billion), a decrease of 83 per cent. It also says it would reduce administrative burdens on businesses by €1 billion (£890 million) a year, after the initial costs of shifting to the new system.96 However, it is not clear if the Commission has considered any variations in the pattern of trade in goods that could result from the new system, or new methods or opportunities for VAT evasion that may arise.

The Government’s view

9.47The Financial Secretary to the Treasury (Mel Stride) set out the Government’s position on the Commission proposals on the “definitive system” of VAT in his Explanatory Memorandum of 24 October 2017.97 He welcomes the formal amendment to the VAT Directive to acknowledge that the objective is to ensure taxation at destination, as Member States stand to gain revenues through a reduction in missing trader fraud. However, the Minister adds that “any change from the current system should be justified on the basis of the benefits it brings to business and to the tax authorities, balanced against the burdens involved”.

9.48In his Memorandum, the Minister also cautions that both tax authorities and businesses would likely experience “cash flow gains or losses” if the new system is introduced. The supplier of a good will experience a new cash flow gain because they will hold the VAT paid by the buyer until the date of their One Stop Shop return, whereas the buyers—who can currently offset output VAT against input VAT on the same return, paying only the difference—“are likely to pay VAT before they are able to claim it back”. Similarly, the buyer’s national tax authority would no longer immediately receive the VAT due, but must wait for it to be redistributed by the Member State of the supplier.

9.49While expressing the Government’s support for the use of the One Stop Shop by businesses to quickly identify the correct VAT rate for a cross-border supply (reducing the administrative burden on suppliers), the Minister questioned the proposed expansion of the OSS’ capabilities to include input VAT deduction by suppliers, as the current system was “not designed to fulfil such a role”. He added that the VAT Refund Directive98 already provides a mechanism for such refunds, giving HM Revenue & Customs and other national tax authorities the opportunity to “scrutinise claims and ensure validity or eliminate errors prior to re-payment being made”. The Minister explained that “allowing an offset within a [One Stop Shop] VAT return will remove this opportunity and potentially open up the system to fraud and double claiming rather than making it more robust”.

9.50In relation to the new status of “Certified Taxable Person”, the Minister stated the Government is “willing to explore the concept”, provided that the “criteria used to assess whether a business qualifies for CTP status and how this status is monitored are effective”. He expressed concerns, however, that the introduction of CTP status could create a “two-tier system for businesses and disadvantaging legitimate start up and smaller businesses who might find it disproportionally difficult or expensive to qualify for CTP status”, and therefore miss out from the simplifications proposed as “Quick Fixes” before the new system takes effect (see paragraphs 9.51 to 9.63 below).

“Quick fixes” to the VAT Directive

9.51In addition to enshrining the “destination principle” in the VAT Directive, the Commission has also proposed a number of technical “Quick Fixes” to the Directive in response to the EU Finance Ministers’ request of November 2016.99 These relate to increased use of the VAT identification number and new evidentiary standards for proof of intra-Community supply to reduce cross-border VAT evasion, and to the VAT treatment of call-off stock and chain transactions of goods.

Call-off stock

9.52Call-off stock refers to a situation where a supplier transfers goods to a buyer’s warehouse, without transferring legal title to the goods until the buyer chooses to take ownership. It is commonly used by online retailers, to ensure stock is available to fulfil orders placed through its website.

9.53Under the VAT Directive, where call-off stock is provided to a buyer in a different Member State than the supplier, the latter makes a both a zero-rated supply and a (fictitious) intra-Community acquisition on arrival of the goods, and therefore has to register in the Member State of destination for VAT purposes. When the buyer subsequently takes ownership of the goods, a domestic transaction occurs. Some Member States have introduced simplification measures by which the fictitious intra-Community acquisition is eliminated, leading to a disjointed application of the VAT Directive.

9.54To ensure a more uniform application of the rules, the Commission has proposed (in document (A)) that call-off stock arrangements should give rise to a single supply and acquisition, with the buyer accounting for VAT on that transaction when they take ownership of the goods. This would eliminate the need for the supplier to account for VAT on the fictitious intra-EU acquisition in all Member States.

Chain transactions

9.55Chain transactions occur where multiple supplies of a good occur but there is only one cross-border transport within the EU (for example when supplier A sells its wares to buyer C via intermediary B, who employ transport company D to physically move the goods directly from supplier A to the buyer).100 Under the current rules, tax authorities and companies often struggle to identify at which part of this chain the “intra-Community supply” occurs (which is the only element which can be zero-rated).101

9.56The Commission has now proposed (in document (A)) that, ordinarily, the intra-Community supply should legally take place when the vendor supplies the goods to the first intermediary (provided that the latter is registered for VAT in a different Member State than where the transport of the goods begins, as that would constitute a purely domestic transaction). The VAT would then be due in the home country of the intermediary. If the intermediary is registered for VAT in the same country as where the transport begins, the intra-Community supply takes place when the goods are delivered to the final customer, with VAT due in the Member State of destination.

VAT identification number

9.57To address the opportunities for missing trader and carousel fraud created by the current system, EU Finance Ministers asked the Commission to propose legislation requiring a supplier to provide a valid VAT identification number for the buyer on their EC sales list before the cross-border supply can be zero-rated. Currently, Member States can impose fines when the identification number is not supplied, but Court of Justice jurisprudence prevents them from refusing to grant the zero-rated exemption (see paragraph 9.26 above).

9.58The Commission has therefore proposed (in document (A)) to make the provision of a valid VAT number for the buyer a substantive condition before the exemption can be granted.

Proof of Intra-Community supplies

9.59As a second anti-fraud measure, the Council also asked the Commission to explore how suppliers might provide evidence to their tax authority of a cross-border sale of goods that qualifies for a zero-rate (in addition to the proposed new substantive requirement to provide the VAT identification number of the buyer as described above).

9.60In response, the Commission has proposed an amendment to the VAT Implementing Regulation (document (C))102 which would introduce the types of evidence a supplier could provide that a supply of goods to a buyer in another Member State had indeed taken place, including a document certifying receipt of the goods, a transport company’s invoice, or the VAT return of the buyer for that particular purchase. The same types of evidence could be used if the goods were transported by or on behalf of the buyer, if they provide the supplier with a written confirmation to that effect.

Restrictions on the “Quick Fixes”

9.61The Commission has proposed that the improvements offered by its “Quick Fixes” relating to call-off stock, chain transactions and proof of intra-Community supplies will only be available where the supplier (and, in certain cases, the buyer or intermediary) has the new “Certified Taxable Person” status (see paragraph 9.43 above). The new substantive requirement relating to the provision of a buyer’s VAT identification number to zero-rate a cross-border supply would be generally applicable.

The Government’s view

9.62In his Explanatory Memorandum, the Financial Secretary states that the details of the “Quick Fixes” will need to be “considered carefully”, but has not made clear the Government’s position on their substance. However, he makes clear that the Government does not believe the Commission had made a compelling case that the proposed changes relating to call-off stock, chain transactions and intra-Community supplies should be restricted to businesses with Certified Taxable Person status only.

9.63With respect to making it a substantive requirement for a supplier to provide a valid VAT identification number for the buyer on their recapitulative statement before a cross-border sale can be zero-rated, the Minister states this “essentially confirms” the Government’s interpretation of existing law, and it supports “putting this matter beyond doubt”.

Next steps

9.64In his Explanatory Memorandum, the Minister notes that detailed consideration of the proposals are unlikely to begin until early 2018. He adds that “rapid progress is not expected on this dossier”, given the “expected diversity of views from Member States, the significant nature of the proposed changes and the need for unanimity”. Similarly, the European Parliament has not yet established a timetable for the delivery of its non-binding opinion on the proposals.

9.65The Commission’s plan is that further legislative proposals will follow in 2018 to cover detailed rules for implementation of the destination principle. Separately, on 29 November 2017, it also published further draft legislation based on its VAT Action Plan, including proposals on the improvement of administrative co-operation between EU tax authorities; the modernisation of the VAT rates structure; and a package of measures to simplify VAT accounting for small businesses. We will consider these in a separate Report in due course.

Our assessment

9.66The Commission proposals, and in particular the first formal steps towards full application of the destination principle which shifts responsibility back to the supplier in intra-EU trade, are a major development in the EU’s common system of value added tax.

9.67We are not convinced that the reforms proposed by the Commission can sensibly be described as a simplification measure. It would effectively create a new transitional system with two parallel systems for cross-border supplies of goods, where a buyer or supplier, depending on the Certified Taxable Person status of the counterparty, would have to apply different VAT rules.103 The proposal, if implemented, would entail significant changes for the administrative burden on exporters, as they would become accountable for VAT (especially as and when the exemption where the buyer is a CTP is removed). More broadly, we question the value of enshrining the principles for the “definitive arrangement” for cross-border VAT in the Directive when proposals for the practical implementation of that system will not be tabled by the Commission until 2018, and we would be grateful for the Minister’s view on legislating intent rather than practicality.

9.68With respect to the “Quick Fixes” to the current cross-border VAT system, we await further information from the Minister about the Government’s position on their merit and technical feasibility.

9.69We ask the Minister to keep us informed of progress in the deliberations within the Council on these proposals. In particular, we are interested in:

Implications of Brexit

9.70We have also considered these proposals, and the EU’s common system of VAT more broadly, in the context of the UK’s withdrawal from the EU. This package of measures—including both the elements related to the “destination principle” and the “Quick Fixes” to the current system—concern only the application of the VAT system to intra-EU supplies of goods. The Minister, in his Explanatory Memorandum, has not provided any indication that they are likely to have a material impact on the UK once it is outside the common system of value added tax.

Remaining in the common VAT area during the “implementation period”

9.71We cannot yet be certain when the UK will actually leave the common VAT area. It remains unclear whether the Government expects—or indeed envisages—that the UK will stay part of that common system for the duration of the “implementation period” that the Prime Minister requested in her Florence speech, which would operate under the “framework” of “existing EU rules and regulations”.104

9.72The consequence of staying in that VAT area for an interim period would be that the current system of intra-Community supplies, and the related vulnerabilities to fraud, would continue to apply to UK businesses. Moreover, the proposals contained in the Commission documents we have discussed in this Report may come to apply in the UK, depending on the speed of their adoption and the length of the transitional period. We have asked the Minister to confirm whether it is the Government’s intention to stay in the common VAT area for the duration of the “implementation period”.

9.73In any event, it is clear that such a transitional arrangement will only postpone rather than negate the implications of the UK becoming a “third country” vis-à-vis the European Union. We have briefly described these below.

VAT controls on imports

9.74Goods imported into the EU from non-EU countries are subject to border controls, to make sure they meet EU standards before they are released into free circulation. In addition, these controls aims to ensure that all relevant taxes—including any customs duties and VAT—are paid.

9.75UK businesses will therefore automatically face border controls and other trade restrictions placed on the export of goods into the EU by virtue of its Customs Union and Single Market. In the context of value added tax, when the UK leaves the common VAT area, the remaining Member States will have to apply border controls on UK goods exported to the EU to ensure VAT is paid.105 Similarly, the Government is expected to collect VAT on goods imported from the EU as it does at present for imports from non-EU countries. This also applies at the border between Ireland and Northern Ireland. In the absence of customs controls, once the UK has left the VAT Information Exchange System, it is unclear how the Government would collect VAT due on goods bought from outside the UK transported into its territory via the Irish border. Moreover, even if the UK made a unilateral decision not to impose VAT or customs controls, Ireland does not have such leeway under its EU Treaty obligations unless the relevant sectoral legislation is amended.

9.76The Chancellor has recently reiterated calls for “free and frictionless trade”106 between the UK and the EU after Brexit, and the Government’s paper on future UK-EU customs arrangements appears to suggest that the UK having to operate “standalone customs, VAT and excise systems”, including the imposition of customs duties and import VAT on exports going in either direction, is “not the Government’s preferred outcome”, and could be mitigated by “further facilitations or agreements”.107

9.77It is unclear if the Government aims to fulfil this by ambition by negotiating a system which avoids such border controls on UK-EU trade flows altogether, following the end of the “implementation period”. This would, presumably, require a replication in some way of the VIES for UK-EU trade in goods which will enable VAT checks to be waived (even if that, in itself, would not solve the issue of other checks carried out at the border which also require physical inspection).

9.78In the White Paper on the Customs Bill,108 the Government alluded to the potential economic ramifications of the reintroduction of customs and VAT controls between the UK and the EU:

“Many business sectors in the UK operate complex supply chains which can involve components crossing borders between EU Member States multiple times during the production process. Time-dependent supply chains (such as fresh foods, medical goods, e-commerce, or just-in-time manufacturing employed by, for example, the automotive industry) have benefitted from the absence of routine customs controls in intra-EU trade, because they are particularly sensitive to administrative burdens and delays caused by customs procedures.”

9.79However, although it underlines the value of the absence of customs and VAT controls on intra-EU trade, the Government then describes the use of the system of intra-Community supplies compared to border controls as a difference in “accounting treatment”. We question the description of such a substantial difference in the way in which VAT is accounted for as such, given that the Government’s own preferred outcome is to maintain “free and frictionless trade”, and it has recognised the potential detrimental effects of border controls on businesses with “time-dependent supply chains”.

9.80Overall, we are not convinced that the imposition of VAT and customs controls between the UK and the EU after Brexit could be avoided through a negotiated settlement. The EU has not abolished border controls for VAT and customs purposes for imports from any non-Member State (including the EFTA-EEA countries Norway, Iceland and Liechtenstein, which are members of the Single Market, or Turkey, which has a customs union with the bloc). We are also unaware of the abolition of such controls between other customs jurisdictions, other than within the EU itself. Therefore, such controls are likely on UK-EU trade even if a trade or customs agreement is negotiated.

Other consequences of leaving the Common VAT Area

9.81The UK’s exit from the common VAT area, whether in March 2019 or at the end of any “implementation period”, will also have important implications for the way the UK VAT system operates domestically, as well as for HM Revenue’s participation in EU-level mechanisms for the exchange of information on VAT and fraud. We will return to these matters in more detail in our forthcoming Reports on the recent Commission proposals relating to VAT rates and mutual assistance between tax authorities.

9.82In anticipation of the Minister’s reply to our questions, we have retained the proposals for a Council Directive and the Council Regulation on the Certified Taxable Person (documents A and B) under scrutiny, and cleared the proposed Council Implementing Regulation and the accompanying Communication (documents C and D).

Previous Committee Reports


59 €1 = £0.8821 or £1 = €1.336 as at 31 October 2017.

60 Explanatory Memorandum submitted by HM Treasury (24 October 2017).

61 The only current exceptions to this are the Isle of Man, the UK Sovereign Area Bases in Cyprus and Monaco. These are all considered part of the EU’s common VAT area, because of their special links to EU Member States.

62 Under the MFN principle, a WTO member that unilaterally grants another country a special favour (in this instance no customs controls for goods coming into the UK at the Irish border) has to do the same for all other WTO members.

63 VIES is the VAT Information Exchange System. See paragraph 9.26 for more information.

64 The recent EU-Norway Agreement on value added tax does not give Norway access to VIES, precisely because VAT is collected at the EU-Norway border on importation of goods going in either direction.

65 European Commission, “Cross-border VAT“ (accessed 22 November 2017).

66 See paragraph 9.70 for more detail on the VAT-related implications of Brexit.

67 The alternative is a system based on the “origin principle”, under which VAT is collected in the country of export and rebated to the importer in the country of destination.

68 In essence, this system was identical to the VAT-rebate process that EU shoppers experienced before the introduction of the Single Market.

69 See COM(1989) 260, 14 June 1989.

70 European Parliament, “Working Paper: Options for a definitive VAT system“ (PE 165.529).

71 See Article 138 of the 2006 VAT Directive.

72 The recapitulative statement is usually referred to as the EC Sales List (ESLs).

73 See the judgments of the Court in cases C-273/11 Mecsek-Gabona, C-587/10 VSTR, C-24/15 Plöckl and C- 21/16 Euro Tyre.

74 Intra-EU missing trader VAT fraud takes place when the company buys goods from another Member State, because purchasing the goods is VAT-free. When selling the goods on domestically, the company receives the entire amount of VAT, which it pockets rather than transferring it to the Treasury. Because the company disappears, this type of fraud is called missing trader fraud. Carousel fraud takes this a step further: the same goods are bought and resold by the fraudster several times via middlemen, and each time the amount of collected VAT increases and the company either disappears or becomes insolvent before the tax authority can collect the accumulated VAT.

75 Under this system, VAT is paid in the Member State where the supplier is based irrespective of the location of the customer.

76 See article 28L of the VAT Directive as introduced by Council Directive 91/680/EEC.

77 In 1996, the Commission proposed for VAT to be collected in one single Member State, with the revenues redistribution based on official macroeconomic statistics to ensure that VAT receipts accrued to the Member State of consumption.

78 See Commission proposal COM(2004) 246.

79 Commission document COM(2010) 695. Cleared from scrutiny by the 2010–2015 European Scrutiny Committee on 8 June 2011.

80 See Commission document COM(2011) 851. Cleared from scrutiny by debate in European Committee B on 23 April 2012.

81 ECOFIN Council conclusions of 15 May 2012.

82 Despite the delays in reforming B2B VAT, the Council did take steps to introduce the “destination principle” to taxation of cross-border business-to-consumer (B2C) supplies of goods and services (which account for far lower volumes of cross-border trade), which the first reforms taking effect in 1 January 2015 and further changes expected to follow in 2019 and 2021. We reported on these reforms separately in our Report of 22 November on the e-commerce VAT package.

83 Commission document COM(2016) 148. Cleared from scrutiny by debate in European Committee B on 21 February 2017.

84 The Action Plan also committed the Commission to other proposals, which have also since been published and several of which we will consider in due course. These include: modernisation of VAT rates policy (document X); a package of measures to simplify VAT accounting for SMEs (document Y) and a proposal to improve administrative cooperation between Member States’ tax authorities (document Z).

85 The Commission ruled out the use of a generalised “reverse charge mechanism”, where VAT is ‘suspended’ along the whole economic chain and is charged only to consumers (compared to the current fractionated system, under which VAT is paid by every intermediary in the supply chain and then deducted from their output VAT). It concluded that its general use would shift the entire VAT collection to the retail stage, making tax revenue flows less predictable, as well as providing new opportunities for fraud (e.g. fraudsters claiming to be businesses to obtain goods intended for final consumption VAT-free).

87 ECOFIN Council conclusions, 8 November 2016.

88 See paragraphs 9.51 to 9.63 for more information on these proposals.

89 Document A is COM(2017) 569.

90 Document B is COM(2017) 567.

91 Document C is COM(2017) 568.

92 Document D is COM(2017) 566.

93 The OSS is currently available only to businesses who sell electronic services to EU-based consumers, although the Council is currently considering expanding it to all cross-border sales to non-business consumers. See our Report on the e-commerce VAT package of 22 November 2017 for more information.

94 We note in this respect that Germany has already voiced concerns about increased use of the One Stop Shop for business-to-consumer supplies of goods and services. See our separate Chapter on the VAT e-commerce package for more information.

95 See Commission document COM(2017) 706. The proposal remains under scrutiny.

96 Commission Impact Assessment SWD(2017) 325, p. 59.

97 Explanatory Memorandum submitted by HM Treasury (24 October 2017).

98 Directive 2008/9/EC.

99 See paragraph 9.33.

100 A more complicated variety of a chain transaction is a triangular transaction, where a business established in EU country A supplies goods to a customer in EU country B, but the goods are shipped directly to the customer from a third EU country (C).

101 See also the judgment of the Court of Justice in C-245/05, Emag Handel, in which it ruled that the intra-EU supply occurs where goods are “dispatched or transported by or on behalf of the vendor or the person acquiring the goods” from one Member State to another. This has been interpreted differently by different Member States.

102 The proposal relating to the evidentiary standard for intra-EU supplies is contained in a separate document because it requires an amendment to the Council Implementing Regulation, whereas the other “Quick Fixes” are amendments to the VAT Directive itself.

103 The supplier would be accountable for VAT where the buyer is not a CTP, but if the latter is a CTP, they would be accountable for VAT. In addition, the Quick Fixes would only be available where both buyer and seller are CTPs.

104 Speech by the Prime Minister (Florence, 22 September 2017).

105 Of course, VAT is only one of a range of tariff and non-tariff barriers that will automatically apply to UK exports to EU countries once the UK leaves the EU and its Single Market. Many of those relate to the UK’s regulatory standards that will no longer be automatically recognised by the EU. This is likely to be the case under any UK-EU free trade agreement as well, as it results from the UK’s exit from the Single Market.

106 HM Treasury, “Autumn Budget 2017: Philip Hammond’s speech” (22 November 2017): “My Right Honourable Friend the Prime Minister has been clear that we seek a deep and special partnership, based on free and frictionless trade in goods and services, close collaboration on security and strong mutual respect and friendship.”

11 December 2017