Documents considered by the Committee on 20 June 2018 Contents

13VAT: Quick Fixes to tackle fraud and reduce burdens on businesses

Committee’s assessment

Politically important

Committee’s decision

(a) Cleared from scrutiny; (b) Not cleared from scrutiny; drawn to the attention of the Treasury Committee

Document details

(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; (b) Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards the certified taxable person

Legal base

Article 113 TFEU; special legislative procedure; unanimity

Department

Treasury

Document Numbers

(a) (39085), 12882/17 + ADDs 1–2, COM(17) 569; (b) (39083), 12880/17, COM(17) 567

Summary and Committee’s conclusions

13.1Since the early 1990s, EU VAT legislation has required businesses who purchase goods or services from a supplier in another EU country to account for the VAT on those supplies and remit the correct amount of tax to their national authorities. This is in contrast to the situation for domestic business-to-business purchases, where the vendor has to account for the VAT due on the sale.

13.2To ensure VAT is only paid once for cross-border supplies, such sales within the EU are zero-rated, with no VAT collected by the Member State of the supplier. The buyer then effectively charges VAT to themselves on their next tax return and pays it to their national tax authority (the ‘destination’ principle). This approach was implemented in the early 1990s as part of the creation of the Single Market, to allow for all border controls on goods moving between Member States to be abolished. As it put the onus for paying VAT on buyers rather than sellers as a ‘fix’ rather than a permanent solution, this system was meant to be ‘transitional’ until EU countries could agree on a new system where VAT would be accounted for in the Member State of the supplier (the ‘origin’ principle).

13.3Twenty years of negotiations failed to produce a consensus for a VAT system on cross-border supplies centred around the ‘origin’ principle, as EU legislation related to tax can be vetoed by any Member State.100 As a result, the European Commission in October 2017 brought forward a proposal for the “definitive VAT system”: this would maintain the destination principle for cross-border taxable supplies (meaning the tax would be paid in the Member State of the buyer), but also introduce the concept of a “Certified Taxable Person” (CTP), essentially a certificate of trustworthiness for businesses. Under the proposal, if a company held a CTP certificate and made a cross-border supply to another EU Member State, it would have to account for the VAT in the Member State of destination and relieve the buyer of that responsibility.101 If a supplier did not have CTP status, the buyer in an intra-EU sale would remain responsible for accounting for the VAT (as at present).

13.4The draft legal text presented by the Commission in October last year would only legislate for the principle of this new approach, with the technical rules set out in a supplementary proposal which was only published in May 2018.102 It has since also tabled flanking measures on reducing VAT-related red tape for small businesses (including reform of the SME VAT threshold, which is also being reviewed by the Government) and proposals to give individual EU countries more flexibility to vary VAT rates.

13.5In addition to enshrining the “destination principle” in the VAT Directive, the Commission’s October 2017 proposal also sought to introduce a number of technical “Quick Fixes” to address known deficiencies in EU VAT rules. These aimed to further restrict opportunities for fraud (by mandating the use of the VAT identification number103 and introducing new evidentiary standards for proof of intra-EU supplies),104 and reduce administrative burdens for businesses by changing the VAT treatment of call-off stock105 and chain transactions of goods.106 We described these ‘Quick Fixes’ in more detail in our Report of 6 December 2017. To incentivise uptake of the use of the Certified Taxable Person procedure as part of the “definitive” new VAT system, the Commission proposed that businesses administrative simplifications offered by these short-term reforms should only be available to companies with CTP status.

13.6By letter of 7 June 2018, the Financial Secretary to the Treasury (Mel Stride) informed us that the Member States had decided to break this proposed link between the CTP status and the ‘Quick Fixes’. Instead, the issue of certifying taxable persons would be considered solely in the context of the “definitive VAT system”, and in particular to determine whether the buyer or sell in a cross-border business-to-business supply between two Member States would be liable to account for VAT. The Council has also diluted the provisions relating to the principles underpinning the new “definitive” VAT system, having preferred to defer substantive discussions on this element until the national Finance Ministries have had a chance to analyse the Commission’s detailed technical rules.

13.7The Minister also notes that there is, however, “broad agreement” on the technical elements of the “Quick Fixes”, which have remained in substance unchanged. The Council has also introduced an additional amendment, creating the option for individual EU countries of permitting a cost sharing exemption for firms in the financial services sector.107 EU Finance Ministers are expected to adopt their common position on the proposal at the meeting of the ECOFIN Council on 22 June 2018, with formal adoption of the “Quick Fixes” to follow after the European Parliament has delivered its non-binding opinion on the proposals in September this year. They would then enter into force in 2019, meaning the UK would also apply them under the terms of the post-Brexit transitional arrangement.

13.8We thank the Minister for his latest update. With the effective removal of the “definitive VAT system” from the Commission proposal while Member States analyse the more recent proposal for the detailed technical rules underpinning the new VAT system for cross-border supplies in the EU, the Council’s deliberations at the ECOFIN Council in June 2018 will effectively focus only on the ‘Quick Fixes’.

13.9The Government has not expressed any concerns about the ‘Quick Fixes’, including the mandatory use of the VAT identification number and the VAT treatment of call-off stock and chain transactions. We note that the Minister has been “encouraged” by the Member States’ “clarifications” to the relevant legal provisions. As such, we are content to now clear the Quick Fixes proposals from scrutiny to enable the Government to support the adoption of a general approach in June and, eventually, their formal adoption. We retain the proposal introducing the concept of a “Certified Taxable Person” under scrutiny pending further discussions within the Council on the definitive EU VAT system.

13.10We also again put on the record our general concerns about the Government’s approach to Brexit and its implications for the UK’s fiscal sovereignty in the area of VAT (which accounted for £125.3 billion in tax revenue for the Exchequer in 2017–18).108

13.11As we noted in our Report on Brexit and VAT, recent Explanatory Memoranda from the Treasury suggest—albeit only implicitly—that the Government believes EU VAT law may continue to apply in the UK beyond the scheduled end of the post-Brexit transitional period in December 2020.109 More recently, the potential significance of EU proposals related to Value Added Tax has increased further because of the continued uncertainty about the scope of the ‘backstop’: the fall-back solution to prevent any need for border infrastructure between Northern Ireland and Ireland even in the absence of a free trade agreement or technological fixes to remove the need for border controls.

13.12The European Commission had proposed that the backstop should require Northern Ireland to remain aligned with EU legislation on VAT (which, for any goods coming from outside the single VAT area, is treated as an import tax and therefore would otherwise require border controls in both directions). This would shift the fiscal and regulatory frontier to the Irish Sea to goods moving between Northern Ireland and Great Britain, which the Prime Minister has rightly described as an unacceptable proposition.

13.13The Government’s own proposal for the fiscal elements110 of the backstop, published in June 2018 as a technical note on ‘temporary customs arrangements’, would keep the UK as a whole bound by “provisions of Union law on value added tax” insofar as that is required for the “application of common cross-border processes and procedures for VAT and excise (…), as well as some administrative cooperation and information exchange to underpin risk-based enforcement”. Crucially, the Government’s proposal does not specify which elements of the VAT Directive and related legislation it proposes should apply to the UK during this period.111 As a result of this ambiguity, the European Commission has already dismissed the UK proposal as a “piecemeal application of EU VAT and excise rules” which creates “serious risks of fraud”.

13.14Nevertheless, it is now official Government policy that at least some parts of new EU VAT legislation which we currently have under scrutiny112 may have to be applied in the UK even beyond the end of the post-Brexit transitional period. The Government “expects” the backstop arrangement would end by December 2021, but has offered no firm sunset clause. It has also previously hinted that VAT proposals not due to take effect until 2022 at the earliest may have to be applied in the UK. In light of this, the Committee will apply scrutiny to all pending EU proposals relating to VAT (as well as excise and customs, which are also included in the backstop proposal) under the assumption that—once adopted—they may be legally binding on the UK irrespective of their date of application.

13.15Our primary concern is that EU law on taxation is subject to a unanimity requirement among Member States, which currently gives the UK a veto. From 29 March 2019, it will lose that veto but would still be bound by new VAT legislation as it becomes applicable—irrespective of whether it would have been adopted before or after the UK ceased to be a Member State. Given the typically long implementation periods for new substantive EU VAT law, this was unlikely to lead to difficulties before the scheduled end of the transitional period in December 2020.113 However, the Government has now proposed the continued application of parts of EU VAT law potentially indefinitely, without specifying the exact scope of its proposed backstop. The ‘temporary customs arrangement’ proposal does not contain any specific safeguard mechanism allowing the UK to opt-out from having to apply new EU fiscal legislation.114 The longer the backstop were to last, the larger the volume of legislation the Government would have to implement without having had any substantial say over its contents.

13.16We therefore remain seriously concerned about the prospect of the UK still applying EU VAT law well beyond 31 December 2020, including reforms outlined in this Report, without the ability to veto any changes which the Government believes are—or could be—detrimental. VAT raised £125 billion in revenue last year, but in effect the Government could potentially be ceding a significant part of its control over this fiscal resource to the EU. We wrote to the Financial Secretary on 13 June 2018 to seek urgent clarification of the legislative and financial impact of the Government’s proposed backstop, and we will continue to press Ministers on these issues. We also draw these developments to the attention of the Treasury Committee, in the context of its inquiry into the future of Value Added Tax in the UK.

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.

Previous Committee Reports

Fourth Report HC 301–iv (2017–19), chapter 9 (6 December 2017) and Twenty-Third Report HC 301–xxii (2017–19), chapter 1 (28 March 2018).

Annex: Recent and pending EU VAT proposals

Proposal

Proposed

Document reference

Scrutiny status

VAT: services and distance sales of consumer goods

December 2016

38341

Cleared on 24 January 2018

VAT: location of customers

December 2016

38342

Cleared on 24 January 2018

VAT: administrative cooperation on consumer goods

December 2016

38343

Cleared on 24 January 2018

VAT on books and newspapers

December 2016

38344

Cleared on 25 January 2017

Reverse charge mechanism for domestic B2B transactions

December 2016

38432

Cleared on 25 April 2017

Quick Fixes’ for the VAT system

October 2017

39085

Cleared from scrutiny on 20 June 2018.

Proof of intra-Community supply

October 2017

39084

Cleared on 6 December 2017

VAT: Certified Taxable Persons

October 2017

39083

Remains under scrutiny. Last considered on 20 June 2018.

EU-Norway VAT Cooperation Agreement

October 2017

39174; 39175

Cleared on 6 December 2017

VAT: administrative cooperation to tackle fraud

December 2017

39299

Cleared on 23 May 2018.

Minimum standard rate of VAT

December 2017

39391

Cleared on 28 March 2018.

VAT: flexibility to set reduced rates

January 2018

39448

Remains under scrutiny. Last considered on 28 March 2018.

SME exemptions from VAT

January 2018

39449

Remains under scrutiny. Last considered on 28 March 2018.

Detailed rules for the ‘definitive VAT system’

May 2018

39795

Awaiting Explanatory Memorandum from HM Treasury

Quick Reaction Mechanism against VAT fraud

May 2018

39796

Awaiting Explanatory Memorandum from HM Treasury


100 For more information about the reasons the Member States failed to agree on a VAT system based on the ‘origin’ principle, please refer to our Report of 6 December 2017, and in particular paragraphs 9.22 to 9.30.

101 Under the proposal, a supplier which has to account for VAT in another Member State under this new system would not have to register in each EU country for VAT. Instead, they would pay the correct amount of tax to their domestic tax authority, who would then distribute it to the correct Member State(s).

102 We received an Explanatory Memorandum from HM Treasury on this supplementary proposal on [date], which we will consider in the coming weeks.

103 To 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. The Commission has therefore proposed to make the provision of a valid VAT number for the buyer a substantive condition before the exemption can be granted.

104 The Council 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 response, the Commission proposed an amendment to the VAT Implementing Regulation 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.

105 Call-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. To ensure a more uniform application of EU VAT rules, the Commission proposed 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.

106 Chain 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). 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). The Commission proposed that, ordinarily, the intra-Community supply should legally take place when the vendor supplies the goods to the first intermediary. The VAT would then be due in the home country of the intermediary.

107 The Minister explains: “This proposal would allow financial services firms to utilise the cost sharing exemption, which applies when two or more organisations with VAT exempt activities join together to form a Cost Sharing Group (CSG). The CSG is an independent entity that enables its members to supply themselves with service at cost and exempt from VAT”.

109 Under the terms of the draft Withdrawal Agreement, the UK would continue to apply EU law—including on Value Added Tax—under a transitional arrangement that is due to end on 31 December 2020.

110 See the technical note on “temporary customs arrangements“ published by the Cabinet Office on 7 June 2018. The proposal deals with fiscal aspects—customs, VAT and excise—only, and refers to the issue of alignment of regulatory controls (such as official controls on animals and animal products) only in passing.

111 We wrote to the Financial Secretary to the Treasury on 13 June 2018 to request more information about the scope of VAT law which the Government proposes should apply to the UK under its version of the ‘backstop’.

112 See Annex.

113 For example, the last major package of VAT reforms (which affect e-commerce) were formally adopted in December 2017, but will mostly take effect in 2021.

114 The Cabinet Office proposal notes only that it “is important that the UK has the ability to continue to help develop the rules that govern trade and customs policy”.




Published: 26 June 2018