Value Added Tax: EU proposals for reform and the implications of Brexit Contents


The UK’s system for value added tax (VAT) is based to a large extent on the EU’s VAT Directive1 and supplementary legislation. The purpose of the Directive is to facilitate the free movement of goods and services within the Single Market, notably by harmonising when and where the VAT liability arises (especially on cross-border sales); restricting which VAT rates national governments can apply to ensure a level playing field; and eliminating the need for controls on intra-EU trade of goods to ensure the correct amount of VAT is paid.

Since October 2017, the European Commission has tabled four separate proposals for a substantial overhaul of the way the EU’s VAT system has operated, in one form or another, since 1992. In this Report, we discuss these four proposals in turn. They relate to the treatment of cross-border sales of goods; the flexibility of individual EU countries to vary their domestic VAT rates; special schemes for small businesses to ease the burden of collecting VAT; and cooperation between the Union’s national tax authorities to combat fraud. We have also focused on the implications of Brexit for the UK’s domestic VAT regime, and the consequences for UK-EU trade.

Until it ceases to be a Member State, the UK will have a veto over any new EU tax legislation.


The system for cross-border VAT within the Community was created in 1967, and although modified throughout the 1970s and 1980s, the basic approach has remained effectively unchanged until the advent of the Single Market. VAT was paid in the Member State of consumption, and customs officers collected the tax on goods being moved between different countries within the Community at the border.

In 1985, to create a true Internal Market for goods, the European Commission proposed the full abolition of border controls on goods moving between Member States. This, it acknowledged, would be a substantial change in the way goods moving between different EU countries were assessed for VAT. A proposal was made to shift the VAT liability for cross-border transactions to the ‘origin’ principle, meaning it would be paid to, and at the rate of, the country of the supplier. This would most closely resemble the system for domestic sales, and thus create a ‘true’ internal market. It failed because Member States could not agree on the necessary harmonisation of VAT rates.2

Instead, the Member States pressed on with abolition of intra-EU customs controls from 1992 and created a “transitional” VAT system—still in effect as of 2018—based on the ‘destination’ principle. With the central role of the customs officers gone, the responsibility to account for VAT was put on the buyer in the destination country. In practice, this meant that a cross-border supply of goods was made at a zero-rate, after which the buyer would effectively charge themselves VAT and pass this to their national tax authority. The Member States also took a first step towards harmonisation of VAT rates, with a view to an eventual move towards the ‘origin’ principle, although they carved out country-specific exemptions for themselves (such as the UK’s continued zero-rate for food and drink).

While this removed the need for border formalities, it also created enormous opportunities for fraud. Consequently, it also led to new administrative requirements for businesses, as well as intensified statutory cooperation between the EU’s tax authorities, to monitor trade in goods and compliance with VAT law. A special “SME scheme” was created to exempt small businesses from charging VAT and provide them with other administrative simplifications.

The “definitive” VAT system

Between 1992 and 2010, the European Commission made several unsuccessful attempts to break the political deadlock on the introduction of the ‘origin’ principle for VAT on cross-border supplies within the EU.

As a consequence, it announced in 2011 that it would prepare legislation to replace the ‘transitional’ 1992 regime with a “definitive” VAT system, still based on the ‘destination’ principle, but one where the supplier in a cross-border transaction within the EU would become responsible for accounting for VAT as if it were a domestic sale. This would also allow more flexibility to be given to individual Member States to vary their VAT rates, as harmonisation of rates had been pursued primarily to lay the ground for the—now-abandoned—‘origin’ system.

Concrete legislative proposals to give effect to this new approach were introduced by the Commission between December 2016 and January 2018 (with technical proposals to follow later this year), including:3

We have set out the substance and implications of each of these proposals in more detail in the chapters of this Report. While the content of the Commission proposals is undoubtedly important, it has been extremely difficult to effectively scrutinise the documents with respect to their potential impact in the UK. In the immediate period after Brexit, the Government’s “implementation period”, the UK would stay bound by EU VAT law and therefore part of the Single EU VAT Area.

However, the Treasury has been unable to provide any detail about its desired VAT arrangements for cross-border trade between the UK and the EU after that. The European Commission recently summarised the implications of an exit from the Single EU VAT area for UK businesses, absent a new legal agreement to the contrary, as follows:4

However, as we explain in the different chapters of this Report, the Treasury appears to assume it could still be bound, or constrained, by EU law when setting the UK’s domestic VAT system in 2022 and beyond. Whether that is because of the length of the post-Brexit transitional period (during which EU law will continue to apply), or because the Government is minded to pursue continued ‘alignment’ with the UK on matters of vale added tax in the long-term, effectively staying in the single EU VAT area, is unclear.

Brexit, effectively, presents a trade-off:

In this Report, we have again urged the Government to set out how it intends to balance these competing pressures, and how collection of VAT on imports can be guaranteed on goods entering the UK via Ireland in the absence of any physical infrastructure on the border.

1 Directive 2006/112/EC, as amended.

2 The ‘origin principle’ VAT proposals gave rise to significant political hurdles: the ‘origin’ principle requires harmonisation of VAT rates, because consumers and businesses would shift their purchases to the countries with the lowest rates lead to tax competition. Moreover, the introduction of the system itself would create a substantial revenue shift to Member States with large supply bases, reducing VAT revenue in other countries and therefore requiring some form centralised redistribution system between national governments

3 A complete overview of recent EU proposals on value added tax considered by the European Scrutiny Committee is shown in the annex below.

4 Notice to Stakeholders on Brexit and customs & indirect taxes (30 January 2018).

5 See our Reports of 22 November 2017 and 24 January 2018 on VAT on e-commerce within the EU.

6 €1 = £0.88415 or £1 = €1.13103 as at 28 February.

8 The Mini One Stop Shop allows suppliers of certain electronic services to consumers in another EU country to pay the VAT to their national tax authority, which then remits it to their counterpart in the Member State of the consumer. See for more information our Report of 22 November 2017 on VAT and e-commerce.

9 The VAT Information Exchange System (VIES), which is only available to EU Member States applying EU VAT law.

10 The European Commission, in the draft Withdrawal Agreement, proposed as a fall-back option that Northern Ireland could remain part of the Single EU VAT Area and continue applying EU VAT law indefinitely to circumvent this problem. However, this would effectively shift the customs border to the Irish Sea, in between Northern Ireland and Great Britain.

3 April 2018