EU Eases VAT Compliance Burden For E-Commerce And SMEs
Things can get very complicated very quickly when governments start introducing multiple VAT rates and exemptions and try to pick winners with the VAT system. And unless VAT legislation is watertight and drafted in such a way that it is not open to interpretations, all sorts of absurdities can ensue.
The United Kingdom, in particular, has history in this area. In the UK, food is generally zero-rated, but some foods are “luxuries” or are considered “catering” and subject to the standard rate. So, in the not-too-distant past, we have seen long-running battles between HM Revenue and Customs (HMRC) and taxpayers over the classification of teacakes (a cake or a biscuit?), Pringles (a potato chip or not a potato chip?) and pasties (hot takeout food, or merely “food”?).
More recently, HMRC was forced to issue a whole brief for publishing houses, wholesalers and retailers to clarify the scope of the zero-rate for coloring and dot-to-dot books, which, curiously, are now finding a large audience among adults keen to relive their childhoods. And while such cases might seem ridiculous, even amusing, to the casual observer, they have huge ramifications for affected VAT-payers, not to mention the time and money spent by the respective parties contesting such disputes through the tax tribunals and courts.
As if coping with one country’s VAT regime wasn’t hard enough though, imagine trying to reckon with up to 28, as intra-EU traders must. In theory, the EU has a single VAT area. But member states are allowed to charge up to two lower rates in addition to their standards rates. Consequently, there are more than 70 separate VAT rates across the EU, plus various other permitted derogations from the VAT directive. In other words, a complicated mess.
The EU VAT regime was recently named among the top-three barriers to the spread of e-commerce in the EU, which is why, as mentioned in this column last month, the EU is rightly taking steps to ease the compliance burden for e-commerce businesses, especially small and micro-businesses. And since its landmark announcement on December 1, it has followed up with consultations on the business-to-business selling rules, exemptions for small businesses, and VAT rates – all of this could lead to more harmonization of the VAT rules in the EU. But while this might sound like an eminently sensible enterprise at first, inevitably there will be winners and losers.
The European Commission would dearly love to do away with lower VAT rates so that member states are permitted to levy only one standard rate. This could help to iron out VAT anomalies, distortions, and disputes and raise substantial revenues for member states, although taxpayers in sectors subject to lower rates could be disadvantaged. Similarly, many taxpayers may grumble if greater VAT harmonization led to more coordination of registration thresholds. These currently vary greatly, from as low as approximately EUR6,700 in Denmark, up to in excess of EUR100,000 in the UK.
However, most taxpayers and tax professionals who have experienced the EU VAT regime would probably agree that changes are sorely needed. It would be tragic, however, if the Commission and the European Council contrived the make a bad situation worse for small businesses. Therefore, the Commission should consider very carefully the feedback it receives from taxpayers in the extensive consultative process that will run between now an early spring 2017.
For more information on this, and other topical international tax matters, please visit: https://www.cchgroup.com/roles/corporations/international-solutions/research/global-tax-weekly-a-closer-look