Documents considered by the Committee on 5 September 2018 Contents

15EU VAT Reform: implications of Brexit

Committee’s assessment

Legally and politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy and Industrial Strategy and Treasury Committees

Document details

(a) Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards the certified taxable person; (b) Proposal for a Council Directive amending Directive 2006/112/EC as regards the introduction of the detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States

Legal base

Article 113 TFEU; special legislative procedure; unanimity



Document Numbers

(a) (39083), 12880/17, COM(17) 567; (b) (39795), 9462/18, COM(18) 329

Summary and Committee’s conclusions

15.1Value added tax (VAT) is one of the main areas of EU legislation on taxation, because it relates to trade in goods and services and therefore has the potential to impact on the EU’s internal market. Normally, for goods entering a country that operates VAT, customs officials check the tax liability before they are released for free circulation. Similarly, goods are checked on export to ensure they have actually left a country’s tax jurisdiction (since VAT is ultimately payable in the country of import, and therefore any input VAT is refunded to the exporter by the tax authorities of the country of export).102

15.2Not to operate such border controls would ordinarily risk significant revenue losses, because incoming goods may not be taxed, and fraudsters could falsely—and repeatedly—claim VAT refunds on ‘exported’ goods that never left the country. However, as part of the Single Market, EU law has completely removed the requirement for border-related formalities for trade between EU Member States. Instead, the VAT Directive103 contains a unique system where cross-border supplies between businesses in different Member States are zero-rated for the purposes of VAT, so that the vendor does not have to account for the tax in the Member State of destination.104 Instead, a reverse charge mechanism105 applies: the purchasing businesses must record a second transaction—a so-called intra-Community acquisition—for the same supply, charging the VAT to themselves and paying it to their national tax authority. This is to avoid a situation where an EU business would have to register for VAT, and comply with the locally applicable tax legislation, in every EU country to which they supply goods or services. For goods sold into the EU from outside the Customs Union, VAT liability is still checked at the border.

15.3To compensate for the lack of physical controls at intra-EU borders, business-to-business supplies between Member States are tracked using a database. This VAT Information Exchange System (VIES) records all cross-border B2B purchases and sales using information submitted by VAT-registered businesses in the European Union. This intra-EU VAT system was introduced on a supposed ‘transitional’ basis in 1992, and by allowing a cross-border supply to be made free of VAT has led to widespread ‘missing trader’ fraud, estimated to cost the EU £44 billion per year.106 In late 2017, the European Commission therefore began the formal process of creating a ‘true’ single EU VAT area, submitting a number of draft Directives to consideration by the Member States in the Council.107

15.4The centrepiece of the reforms is a Commission proposal for the “definitive” VAT system on cross-border sales within the EU. Following the publication of the legal principles to underpin this new system in October 2017, we considered the VAT reforms in some detail in our Reports of 6 December 2017 and 28 March 2018.108

15.5The Commission published further detailed implementing rules for the new intra-EU VAT system in May 2018. These were submitted for scrutiny by HM Treasury just before the summer recess. Under the new legal framework as proposed, VAT on intra-EU business-to-business (B2B) sales would continue to be paid to the Member State of the company making the purchase (the so-called ‘destination’ principle). However, the proposed legislation would end the current practice of making the purchaser account for the VAT (the so-called “reverse charge mechanism”), a key feature of the transitional system. Instead, the supplier would have to account for the VAT on a cross-border sale, and the ability to make an intra-EU supply without having to apply value added tax would cease.

15.6To mitigate the significant impact of this administrative change on businesses and national tax authorities,109 the Commission has simultaneously proposed to expand the use of an EU-wide mechanism ‘One Stop Shop’ mechanism that allows suppliers to pay VAT on sales to any Member State in their own country. While accounted for domestically by the supplier, the VAT would be paid at the rate applicable in the country of consumption and then remitted to the tax authority of the latter. However, adding complexity, the current reverse charge mechanism would be maintained for transactions where the buying business had “Certified Taxable Person” (CTP) status, meaning they were officially considered a reliable taxpayer, unlikely to engage in VAT fraud. Finally, and controversially, the Commission also wants to enable businesses to deduct their input VAT via this system, rather than via the existing VAT refund system on cross-border sales between EU Member States.

15.7The changes the ‘definitive’ VAT system proposal would make to intra-EU supplies of goods are shown in the table below:

Table 1: VAT on B2B intra-EU sales of goods

Which country’s VAT rate applies?

Who accounts for VAT?

Are cross-border supplies zero-rated?

Can the vendor use the OSS accounting mechanism?

Current situation

Member State of destination


Yes, the sale is split into two transactions for legal purposes. The cross-border supply itself is zero-rated, and the buyer creates a second ‘acquisition’ and charges themselves VAT

No, as they are not liable for VAT

Proposed approach

Vendor, except where the buyer has CTP status

No, the sale consists of a single transaction on which VAT is charged by the supplier to the buyer

Yes, except where the buyer has CTP status

15.8The Government cautiously welcomed the proposals, but told us in October 2017 that further detailed consideration would be necessary. In particular, the Financial Secretary to the Treasury (Mel Stride) highlighted the problems that could arise from two parallel systems of accounting for VAT 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 did not assess the implications for UK businesses, both buyers and suppliers, of leaving the EU’s common system of VAT. The Minister has reiterated those concerns in his latest Explanatory Memorandum of 27 June 2018 on the Commission’s detailed implementing proposals for the new system.

15.9The Committee has considered the VAT reform proposals on several occasions since they were formally proposed in late 2017, and retained them under scrutiny. While we remain concerned about the complexity of the new system proposed by the Commission, where two systems of accountability for VAT would operate in parallel, our primary concern had been the lack of clarity from the Government about its plans to mitigate the VAT-related barriers that Brexit would, by default, impose on UK-EU trade flows unless a new agreement is in place by the time the UK is due to leave the single EU VAT area (at the end of the post-Brexit transitional arrangement, the end date of which is not yet known).

15.10As noted, when the UK ceases to be bound by EU VAT law, VAT will by default become an import (border) tax on goods moving between the UK and the EU-27. To ensure revenue is protected, both the UK and EU will either need to impose customs controls on goods entering, or agree for the UK to remain part of the VAT Information Exchange System that allows both sides to track which goods are entering and leaving their respective territories. The former option is the default scenario, since the latter requires a detailed (and unprecedented) agreement with the EU, negotiations on which have not begun. On 23 August, as part of its first batch of ‘no deal’ technical notices, the Government announced that—should the UK leave the EU without a transitional arrangement on VAT—HM Revenue & Customs will not assess VAT liability on any imports (EU and non-EU) at the border. Instead, businesses would account for “import VAT on their VAT return, rather than paying [it] on or soon after the time that the goods arrive at the UK border”. The impact of this system of ‘payment on account’ on overall revenue collection, by significantly increasing the risk of missing trader fraud, has not been publicly quantified.

15.11However, while the Government insists the ‘no deal’ scenario is “unlikely”, it is yet to specify clearly what its actual plans are for a new arrangement with the EU on VAT after the end of the proposed transitional period. In its White Paper on the future UK-EU relationship, it proposed to establish ‘common procedures and processes’ for VAT on UK-EU trade in goods to avoid the need for border controls, but without specifying what those might be. We previously concluded that such an arrangement was likely to require the continued application of significant parts of EU VAT law to the UK, and the Government has refused to categorically state that the latest proposals for reform of the VAT Directive will not apply to the UK (despite the fact they are unlikely to take effect until 2022 at the earliest).

15.12The Government’s approach to VAT in the negotiations with the EU was complicated further when, on 16 July 2018, it accepted an amendment to the Taxation (Cross-Border Trade) Bill which makes it “unlawful for HMRC to account for any duty of […] VAT […] collected by HMRC to the Government of a country or territory outside the United Kingdom” unless the Treasury certify that “arrangements have been entered into by Her Majesty’s Government and that government under which that government will account to HMRC for those duties and taxes collected in that country on a reciprocal basis”. The implications of the amendment for the ‘common processes and procedures’ approach remain unclear, precisely because the Government has not specified what those might be.

Our conclusions

15.13VAT is the subject of a web of extremely complicated EU legislation, and these latest Commission proposals for the ‘definitive’ intra-EU VAT system would remove complexity in some areas, while adding it in others. The overall implications for businesses and tax authorities within the EU are not yet clear, and will depend to a large extent to the modifications the Member States are likely to make when considering the proposal in more detail over the coming months (and possibly years).

15.14In particular, while these latest proposals may close one loophole—missing trader fraud on zero-rated supplies from one Member State to another it is clear the Treasury is not yet convinced that it will not open up opportunities for fraud elsewhere in the system. It also remains unclear to us what incentive businesses would have to apply for ‘Certified Taxpayer’ status, given that this appears to confer no direct benefits but would require them to continue to account for VAT on intra-EU purchases.

15.15Irrespective of the landing zone for these proposals after they have been amended by the Member States, the UK’s approach to VAT on trade in goods with the EU is currently effectively in limbo. The EU’s system is the result of a difficult compromise, reached because the Member States had agreed on the overall objective of making a borderless Single Market a reality. The implications of the UK’s decision to leave the EU—and, by extension, the single VAT area—show the sharp contrast between treatment of goods entering the EU from ‘third countries’ and those moving between EU Member States.

15.16Outside the EU, VAT is an import tax where it involves a supply of goods from one country to another, necessitating border controls to ensure payment of the correct amount of VAT by the importer and the payment of VAT refunds only for goods that are actually exported. Within the EU, those controls have been removed and replaced with an elaborate electronic system—reliant on the submission of monthly statements of intra-EU purchases and supplies by businesses—that aims to allow tax authorities to track goods as they move around the EU, to minimise the risk of VAT evasion. It is part of a wider package of EU VAT law, such as restrictions on rates to avoid competitive rate lowering.

15.17As a result, the trade and tax implications of the UK leaving the single VAT area are profound. From the Treasury’s perspective, it will require either border controls, continued participation in the EU’s VAT Information Exchange System,110 or an acceptance that revenues from Value Added Tax—which totalled £125 billion in 2017–18111—might be significantly eroded through evasion and fraud. The Government now appears to have accepted the latter in the event of a ‘no deal’ Brexit, preparing for import VAT to be checked on the basis of businesses’ regular VAT returns rather than through border checks. The impact this would have on the Exchequer’s overall receipts from VAT is unclear.

15.18However, ‘no deal’ preparations notwithstanding, the need for a mutually acceptable solution to the matter of import VAT is especially acute in Northern Ireland. Under EU law, Ireland will be under an obligation to perform fiscal controls on goods entering the Customs Union from the North unless there is an agreement with the UK that renders them unnecessary. The European Commission has therefore proposed a ‘backstop’ to keep the border between the UK and Ireland free of customs and regulatory infrastructure, by extending EU VAT legislation to Northern Ireland, and effectively shifting the fiscal frontier to the Irish Sea. As part of its own ‘backstop’ proposal, the Government has instead proposed to replicate the outcome of the EU’s current system—the abolition of fiscal controls at the border on trade in goods between the EU and the UK as a whole—without being fully bound by EU VAT law. Instead, it suggested in its recent White Paper that there should be “common processes and procedures” for VAT (and excise duty).112 However, it has failed to advance any detailed proposals about the substance of those ‘processes and procedures’ might be, and to what extent they would entail continued adherence to elements of EU VAT legislation indefinitely.

15.19As we have noted before, we are extremely sceptical that the UK could remain part of the VAT Information Exchange System—and negate the need for any fiscal border controls on trade with the EU—without being subject to the same legal restrictions as the remaining Member States, in particularly as regards the minimum VAT rates that EU law currently imposes (the proposed loosening of those restrictions notwithstanding). If the abolition of VAT-related controls on cross-border trade could have been achieved in a less prescriptive way, it is unclear why the Member States—which all have a veto over EU tax law—would have supported the system that currently exists. The risk is therefore that the Government’s approach could require the continued application of EU VAT law indefinitely, including future amendments over which the UK—as a ‘third country’—will lose its veto on 29 March 2019.

15.20Further problems would arise even if the Government’s approach (of keeping the benefits of the single VAT area for trade without the same legal obligations) was, in principle, acceptable to the EU. It is doubtful that an agreement to that effect could be negotiated and implemented in time before the UK leaves the single VAT area at the end of the post-Brexit transitional period in December 2020:

Questions for the Minister

15.21In light of the possibility that EU VAT law may apply in the UK under the terms of a new UK-EU VAT Agreement, we have again decided to retain the reform proposals described in this Report under scrutiny.

15.22We also find it extremely regrettable that the Minister is still unable to articulate the Government’s position with respect to the need to avoid physical VAT controls on UK-EU flows of goods as part of a long-term trade agreement with the EU, beyond the platitude that the outcome is “subject to negotiations”. We are, obviously, not asking the Minister to divine what the outcome of the negotiations might be. Rather, in the interests of transparency, he should be clear what the Government is asking for in talks with the EU. For the discussions with the European Commission on VAT controls to be meaningful, the Government must have a position to take on what those might entail; more so in light of the unprecedented nature of what it appears to be asking for. Instead, the Minister is giving the impression that the Government’s proposal for “common processes and procedures” between the UK and the EU on VAT was included in the White Paper either without further consideration as to what they might be in practice, or in recognition that stating more explicitly what they might entail would risk a backlash.

15.23Given the need for Parliament (and the public) to be fully informed of the potential implications of the future arrangement with the EU for the UK’s fiscal autonomy, neither of these options is acceptable. We therefore ask the Minister to write to us by 20 September 2018 to clarify:

15.24If the Minister cannot provide further information on the substance of the “common processes and procedures” in particular, we expect his letter to explain in detail why this is the case. It cannot be to retain a negotiating advantage over the EU, given that by definition the UK needs to be clear about its desired outcome on VAT cooperation if it wants to stand a chance of negotiating that outcome successfully. At the very least, it should seek to secure a reference to its proposals in the European Council’s political declaration on the future partnership that would supplement the Withdrawal Agreement, which would form the basis for trade negotiations once the UK has formally become a ‘third country’.

15.25In anticipation of the Minister’s reply, given the uncertainty about both the final substance of the new VAT Directive and the lack of clarity about the Government’s proposals for a new VAT arrangement with the EU on cross-border trade, we retain the documents under scrutiny. We also draw these latest developments to the attention of the Business, Energy and Industrial Strategy and Treasury Committees.

Full details of the documents

(a) Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards the certified taxable person: (39083), 12880/17, COM(17) 567; (b) Proposal for a Council Directive amending Directive 2006/112/EC as regards the introduction of the detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States: (39795), 9462/18, COM(18) 329.

Previous Committee Reports

See 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: Overview of EU VAT proposals currently or recently under scrutiny



Document reference

Scrutiny status

VAT: services and distance sales of consumer goods

December 2016


Cleared on 24 January 2018

VAT: location of customers

December 2016


Cleared on 24 January 2018

VAT: administrative cooperation on consumer goods

December 2016


Cleared on 24 January 2018

VAT on books and newspapers

December 2016


Cleared on 25 January 2017

Reverse charge mechanism for domestic B2B transactions

December 2016


Cleared on 25 April 2017

Definitive VAT system and ‘Quick Fixes’

October 2017


Cleared on 20 June 2018117

Proof of intra-Community supply

October 2017


Cleared on 6 December 2017

VAT: Certified Taxable Persons

October 2017


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


Cleared on 23 May 2018

Minimum standard rate of VAT

December 2017


Cleared on 28 March 2018

VAT: flexibility to set reduced rates

January 2018


Remains under scrutiny. Last considered on 28 March 2018.

SME exemptions from VAT

January 2018


Remains under scrutiny. Last considered on 28 March 2018.

Definitive VAT system: detailed implementing rules

May 2018


Remains under scrutiny. Last considered on 5 September 2018.


102 VAT, though payment is fractioned throughout the supply chain, is ultimately only payable by the final consumer. Therefore, a business that exports a good to another country should not accrue any VAT liability in their home jurisdiction, and as such is entitled to a refund of input VAT paid on their supplies.

104 Different rules apply for business-to-consumer sales. For purchases made by the consumer while in a different Member State, VAT is accounted for by the supplier to their national tax authority. For distance sales within the EU, VAT must be accounted for in either the country of origin or the country of consumption, depending on the circumstances. We discussed this aspect of EU VAT law in more detail in our Report of 24 January 2018 (paragraph 12.28).

105 Reverse charge refers to the fact that it is the business making the purchase, not the supplier, who has to account for the VAT.

106 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 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.

107 EU legislation on taxation requires the unanimous agreement of all Member States, with the European Parliament only playing a consultative role.

108 In parallel, the Commission published supplementary proposals giving Member States more flexibility to set reduced VAT rates, to increase cross-border cooperation to fight VAT fraud, and to reduce the administrative burden of accounting for VAT for small businesses. We have considered those separately in our Report of 28 March 2018.

109 Under the proposed intra-EU system, 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.

110 Implausibly, the UK could also seek to create a parallel VAT information exchange system but it is difficult to see the other Member States agreeing to such a costly and duplicating enterprise.

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

114 For the infringement case related to customs legislation, see our Report of 24 January 2018.

115 For the infringement case related to VAT legislation, see the Commission’s press release of 19 July 2018.

116 See for more information on customs procedure 42 European Court of Auditors press release ECA/11/47 (13 December 2011).

117 The ‘Quick Fixes’ element of the proposal was split from the ‘definitive VAT system’ and the related Certified Taxable Person proposal, to allow the short-term changes to take effect more rapidly. The ‘Quick Fixes’ are expected to be adopted by EU Finance Ministers in autumn 2018. See for more information our Report of 20 June 2018. The ‘definitive’ system and CTP status proposals remain under scrutiny (documents 39083 and 39795).

Published: 11 September 2018