Documents considered by the Committee on 24 January 2018 Contents

12VAT: e-commerce package

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny; drawn to the attention of the Business, Energy & Industrial Strategy Committee

Document details

(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

Legal base

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



Document Numbers

(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

Summary and Committee’s conclusions

12.1Typically, within the EU, value added tax (VAT) on cross-border business-to-consumer (B2C) sales of goods and electronic services must be paid in the Member State of the customer. However, to reduce the administrative burden on traders of having to comply with the VAT legislation of another EU country, businesses benefit from an intra-EU threshold under which they can pay VAT on cross-border sales of goods as if it were a domestic transaction.143

12.2The various complexities within this system,144 for example the different national thresholds to determine in which Member State VAT would have to be paid on B2C transactions, led the European Commission to propose in December 2016 a legislative rationalisation of the way in which VAT must be paid on B2C sales within the EU.

12.3In December 2017, EU Finance Ministers unanimously supported the proposals, which will take effect in two tranches in 2019 and 2021. The key elements of the reforms, which are set out in more detail in our Report of 22 November 2017, include:

12.4The detailed rules necessary for the implementation of the reforms will be drafted by the Commission as a proposal for a Council Implementing Regulation, due to be presented for consideration—and amendment—by the Member States later this year.

12.5The Financial Secretary to the Treasury (Mel Stride) informed the Committee in October 2017 that the Government was supportive of the proposals as amended by the Member States. The Minister confirmed this by letter of 11 January 2018, in which he added that the legislation as adopted “achieved an acceptable balance for the UK”. Accordingly, it voted to support their adoption at the ECOFIN Council in December.

12.6There are also particular VAT consequences for the UK in the context of its withdrawal from the EU. When it leaves the EU’s common VAT area, the UK will be considered a “third country” for the purposes of EU VAT legislation. As such, VAT will become an import tax for goods exported from the UK to the EU and vice versa (which must, in principle, be collected by customs authorities at the border before the goods can be released).146 Within the EU, such border controls are always absent as part of its internal market policies.

12.7In the context of VAT on e-commerce sales by UK suppliers to EU-based consumers, the consequences of Brexit are significant. Once the UK is outside the common VAT area:

12.8The reforms adopted by the Council last December do not fundamentally alter the impact of Brexit on the way in which UK businesses will have to account for VAT on B2C sales into the EU after the UK becomes a “third country”. To some extent, the expansion of the MOSS to cover sales by non-EU businesses of all services and goods under €150 (£170)147 will mitigate the administrative burden as all VAT on those sales to the EU can be accounted for in a single EU country. However, it still requires a UK company to register for VAT in another country. Moreover, the MOSS will not be of any use for sales to EU-based businesses (which account for a much larger proportion of cross-border transactions).148 UK traders will also not benefit from Low Value Consignment Relief once goods sent from the UK to the EU are classified as “third country” imports, as the exemption is set to be abolished.

12.9However, when precisely these changes in the VAT treatment of UK sales into the EU would take effect (or, indeed, whether the Government will be able to secure a different VAT arrangement with the EU to reduce the impact of these changes on UK businesses) is unclear.

12.10As set out in more detail in paragraph 0.27, the most fundamental reforms contained in this new legislation are due take effect on 1 January 2021. However, there are already indications this timetable may slip because of the complexities of the necessary changes that need to be made to national VAT systems.149 Moreover, at present, it is unclear what the UK’s position in relation to the EU’s common system of VAT will be after March 2019. The European Commission has proposed that a post-Brexit transitional arrangement, during which the UK would in effect be classified as an EU country by the other Member States for VAT purposes, should end on 31 December 2020.150 By contrast, the Prime Minister apparently envisages a transition that could potentially last longer, in which case UK businesses might still be treated as EU companies when the reforms take effect.151

12.11With respect to the Government’s position on the VAT implications of Brexit, the Minister in his letter of 10 January states that “ahead of the conclusion of negotiations, it is not possible to answer some of these questions in detail”.

12.12We thank the Minister for the information he has provided on the final agreement on the VAT e-commerce package, and the Government’s position thereon. As the new legislation has now been adopted and published in the Official Journal, we clear the proposals from scrutiny.

12.13Important questions remain outstanding about the full implications of the UK leaving the EU and its common VAT area. The Minister has been unable to provide any indication of the Government’s proposals to minimise disruption to UK-EU trade resulting from the UK establishing its own VAT regime, or indeed whether it is Government policy for the UK to remain in the common VAT area after Brexit. While the immediate impact looks set to be minimised by a post-Brexit transitional period (during which the UK would, presumably, be treated as an EU country by the other Member States for VAT purposes), the situation after this arrangement is much less clear.

12.14When the UK eventually leaves the common VAT area, import VAT barriers could cause delays and cash flow issues for businesses in both the EU and the UK, as fiscal border controls will need to be applied which are currently absent.152 We understand that the impact of those “fiscal frontiers” could be mitigated by deferring the collection of VAT until after goods have cleared the border, but for goods exported from the UK to the EU the existence and requirements of such deferrals will vary country-by-country.

12.15With respect to this new legislation on the VAT treatment of supplies of goods and services sold to EU consumers via the internet, we do not know if the reforms—including the abolition of LVCR and the extension of the MOSS for both EU and non-EU suppliers—will apply to UK traders as “third country” businesses, or whether they will be treated differently under the terms of a transitional arrangement (or indeed a new UK-EU agreement on VAT altogether).

12.16A key difference is that, as “third country” traders, UK businesses will have to register for VAT in an EU country to use the MOSS, as HM Revenue and Customs will no longer be subject to EU VAT legislation and will therefore sit outside the legal system that underpins the transfer of VAT revenues between Member States.153 Similarly, VAT on sales of goods by UK businesses to EU-based consumers will always have to be accounted for in the Member State of the customer (within the EU, below a certain value threshold, VAT on such supplies can be accounted for in the supplier’s own Member State).154

12.17We will continue to press the Government on these matters, and we hope the issue of VAT on cross-border supplies between the UK and the EU will be addressed as soon as possible as part of the negotiations on the future bilateral relationship. The Committee will report to the House and the relevant Select Committees on VAT matters and Brexit as it continues its scrutiny of other recent proposals to modify the EU’s VAT legislation.

12.18We also draw these latest developments to the attention of the Business, Energy and Industrial Strategy Committee, in the context of its inquiry into “Brexit and the implications for UK business”.

Full details of the documents

(a) Proposal for a Council Directive on certain value added tax obligations for supplies of services and distance sales of goods: (38341), 14820/16 + ADDs 1–2, COM(16) 757; (b) Proposal for a Council Implementing Regulation laying down implementing measures for the common system of value added tax: (38342), 14821/16 + ADDs 1–2, COM(16) 756; (c) Proposal for a Council Regulation on administrative cooperation and combating fraud in the field of value added tax: (38343), 14822/16 + ADDs 1–2, COM(16) 755.


12.19In December 2016, the European Commission tabled a package of three 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.

12.20These 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 sought to curtail firms’ ability to treat cross-border sales of goods within the EU as domestic transactions. In addition, the existing VAT exemption for low-value parcels imported from non-EU countries would be abolished. We set out the substance of the Commission’s package of measures in more detail in our Report of 22 November 2017.155

12.21In the correspondence between the Committee and the Financial Secretary on the proposals, the Government persistently expressed concerns about some elements of the proposals. In particular, it thought the lower threshold for distance sales of goods could increase burdens for small businesses; the abolition of LVCR should be balanced against any additional burden on businesses and tax authorities; and non-EU businesses (e.g. UK firms after Brexit) would be put at a disadvantage by the proposed criteria for using the MOSS.156

12.22Each Member State has a veto over EU taxation proposals, and the European Parliament has no binding say. In autumn 2017, the Estonian Presidency of the Council prepared a general approach on the proposed legislation; this compromise legislative text preserved most of the substance of the original Commission proposals but made some changes to meet the concerns of the Member States.

12.23The Financial Secretary to the Treasury (Mel Stride) wrote to us on 24 October157 and 6 November 2017158 with his assessment of the compromise text, which he said offered “a reasonable compromise” which the Government—despite the apparent earlier misgivings—wanted to support. The Minister therefore requested a scrutiny waiver to enable him to support the Presidency’s text at the November Council meeting. However, due to the delays in reconstituting the Committee following the general election, we were unable to consider this request in advance of the ECOFIN meeting on 7 November.

12.24In the event, the Council did not adopt the tabled text. We understand Germany expressed concerns over the timing and substance of the further implementing legislation that will need to be adopted to make the new VAT rules function effectively, the principles for which were set out in a draft statement to be annexed to the legislation.159 Accordingly, at its meeting on 22 November, the Committee retained the documents under scrutiny in anticipation of an update from the Minister on any additional changes made the Council statement on the necessary implementing regulation.

Developments since November 2017

12.25On 23 November, the Minister wrote to the Committee again about the proposals. He confirmed that Presidency was preparing a new statement ahead of the December ECOFIN meeting, but no further changes to the legislation itself.160 The new statement was circulated on 30 November, and articulated in more detail the Commission and Council’s intentions for the upcoming draft implementing regulation.161 In particular, the statement now explicitly mentions the possibility that the introduction of the reforms may have to be delayed if the necessary IT systems to make the expanded Mini One Stop Shop function are not in place in time.

12.26At the Minister’s request, the Committee granted a scrutiny waiver allowing the Government to support adoption of the proposals at the ECOFIN meeting on 5 December.162 EU Finance Ministers formally adopted the new legislation, and the amended statement, by unanimity at that meeting.163

The substance of the new VAT e-commerce legislation

12.27The final legislative package mirrors the original European Commission proposals to a large extent. It includes the following short-term reforms, which will apply from January 2019:

12.28A second tranche of more fundamental reforms is planned to take effect from 1 January 2021. It includes:

The intra-EU threshold for distance sales of goods

The Mini One Stop Shop accounting mechanism for cross-border VAT

Low Value Consignment Relief

Further legislative proposals

12.29The 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.

12.30The Council and the Commission are also agreed on the need to “consult business further in the drafting of the necessary implementing regulations and the need to monitor progress to ensure that all the component elements of the second tranche of changes are in place ahead of implementation in 2021”.170

The Government’s view

12.31On 10 January 2018, the Minister wrote to us with information on Government’s objectives for the legislative proposals, and to what extent they were reflected by the final package as agreed by the Council on 5 December:

Implications of Brexit

12.32In its Report of 22 November 2017, the Committee raised a number of concerns about the implications of the UK leaving the EU’s common VAT area for British businesses.

12.33In his reply, the Minister says that “it is not possible to answer” many of the Committee’s questions in the previous Report. Although he reiterates the Government’s objective of a “deep and special partnership with the EU, based on free and frictionless trade in goods and services”, the Minister is unable to provide any detail of a possible UK-EU VAT arrangement that would mitigate some of the consequences of the UK leaving the common VAT area.

12.34The Minister does confirm that:

Previous Committee Reports

Twenty-Sixth Report HC 71–xxiv (2016–17), chapter 7 (18 January 2017); Fortieth Report HC 71–xxxvii (2016–17), chapter 17 (25 April 2017) and Second Report HC 301–ii (2017–19), chapter 19 (22 November 2017).

143 For non-electronic services provided to consumers on a cross-border basis within the EU, VAT is typically (but not always) charged in the Member State of the supplier. See: European Commission, “Other services ordered online and provided in traditional format“ for more information.

144 See our Report of 22 November 2017 for more information on the rationale behind the latest reforms of VAT on B2C sales within the EU.

145 At present, the MOSS is only available to traders who sell electronic services to consumers in other Member States.

146 Although individual countries can adopt deferment procedures exist to allow the VAT to be collected after the goods clear the border, to reduce the administrative burden on traders importing goods.

147 £1 = €0.87985 or €1 = £1.13655 as at 30 November.

148 A proposal to create a One Stop Shop for intra-EU business-to-business sales is under consideration, but as currently drafted this new legislation would not apply to sales into the EU by non-EU businesses. See our Report on the Single VAT Area of 6 December 2017 for more information.

149 See paragraphs 0.29 and 0.30 for more information on the timetable for implementation of the reforms.

150 European Commission, Supplementary Article 50 negotiating directives (20 December 2017).

151 On 20 December 2017, the Prime Minister told the Liaison Committee: “ [The European Commission] have set that end December 2020 date because that covers their current budget plan period (…) but we will obviously have to discuss it, because this is a practical issue about how long certain changes would need to take to be put in place”.

152 See for more information our Report on the Single EU VAT area (6 December 2017).

153 See paragraph 0.30 for more information on use of the MOSS by non-EU businesses.

154 Idem.

156 The concerns expressed by the Government are discussed in more detail in paragraph 19.25 of our Report of 22 November 2017.

157 Letter by Mel Stride to the Chair of the European Scrutiny Committee (24 October 2017).

158 Letter by Mel Stride to the Chair of the European Scrutiny Committee (6 November 2017).

159 See Council document 13841/17, p. 52, for the original draft statement.

160 Letter from Mel Stride to Sir William Cash (23 November 2017).

161 The final statement is contained in Council document 14769/17/REV.

162 Letter from Sir William Cash to Mel Stride (29 November 2017).

164 The Member States rejected the Commission proposal to allow MOSS users to follow the record retention rules of the Member State where they are registered for VAT rather than where the customer is based.

165 £1 = €0.87985 or €1 = £1.13655 as at 30 November.

166 See the Committee’s Report of 6 December 2017 on the EU-Norway VAT Agreement.

167 Online marketplaces will also be accountable for VAT on sales of goods of any value from third country businesses to EU consumers, where the goods are already located within the EU at the point of purchase.

168 Goods imported from outside the EU which are priced at less than €22 (or €10 in some Member States) are exempt from VAT.

169 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. The Minister, in his letter of 11 January 2018, explains that “this proposal was put forward by another Member State and received little interest in Council as it would have delayed the proposed implementation date by 2–3 years as well as introducing a slightly more complex system than envisaged under the proposal”.

170 Letter from Mel Stride to Sir William Cash (10 January 2017).

171 For the supply of electronic services, UK firms could use the MOSS as soon as the UK becomes a third country vis-à-vis the EU. However, they will need to register for VAT in an EU country.

29 January 2018