It’s been a peculiar couple of weeks for the EU’s longstanding VAT harmonization project.
Last week, the European Parliament formally approved the European Commission’s proposal to introduce in January 2017 a standard VAT return across the whole of the EU. I have written about the plan elsewhere, but briefly summarized, the proposal involves regularizing the types of information required on VAT returns in different member states (to a standard five boxes, with an additional thirty optional), regularizing reporting periods across Member States, establishing a common format for VAT returns across member states, and enabling all returns to be submissible electronically.
The aim of the standard return project is to make trading across Europe – particularly between Member States – more straightforward, and to cut the costs of compliance. Algirdas Šemeta, commissioner for taxation, commented after the vote:
‘The standard VAT return presents a win-win situation. Businesses will enjoy simpler procedures, reduced costs and less red tape. Governments will have a new tool to facilitate VAT compliance, which should increase the revenues they collect.’
It all sounds so reasonable, doesn’t it? What you wouldn’t pick up from reading reports of the vote is just how controversial the proposal really is.
My colleague Laurent Doggett makes the point that many businesses could actually have higher compliance costs under the terms of the proposal: ‘businesses who do not currently have to submit returns on a monthly basis… could potentially see the number of submissions they are required to make increase.’
And there are other fundamental matters at issue. Take those boxes, for example. In the UK, we currently only ask for nine boxes to be filled out; but in Italy, there are over five hundred! Different countries use VAT returns for different information gathering purposes; and they can be quite secretive about what they want to know. When the Commission asked France what data it required from VAT returns, the French tax authorities refused to tell! For many countries, tax is an inherently national matter.
The UK seems to be one such country. Her Majesty’s Government has been broadly supportive of attempts to improve VAT efficiency in the EU, but David Gauke, the exchequer secretary, has told MP’s considering proposals that ‘there are also actions the Government will need to watch (including standardised VAT return and VAT rates)’ (www.parliament.uk/briefing-papers/sn02683.pdf?). The minister explains that:
The Government is also supportive of the broad aims of reducing administrative burdens; combating fraud; and modernisation and simplification. However, the Government will counter unhelpful ideas, including for example those that might lead to an erosion of UK national sovereignty or result in tax matters being dealt with otherwise than in Council under a unanimity basis.
The problem for the Commission is that Member States continue to insist stubbornly on their right to determine their own tax destinies. I used the word ‘harmonization’ at the beginning of this piece, because the original goal of EU VAT reform was to have one VAT rate and one return everywhere: a completely harmonized system across the EU, which the Commission long considered to be the ideal model for indirect tax in the single market. That aspiration has now been shelved in favour of ‘standardization’; a diluted attempt to bring member states into approximate conformity.
For many countries, tax is an inherently national matter.
But, as David Gauke’s comments suggest, even ‘standardization’ may be going too far. The European Parliament may have rubber-stamped the proposal, but the standard return would have to be accepted unanimously by member states: and there are already rumours that major players – including France and Germany – have grave reservations about the plan.
Getting member states to agree on VAT policy seems to be about as hard as herding cats. In just the last few days a row has broken out over VAT in a future independent Scotland; France has confirmed its reduction of VAT on digital newspapers (for which it is being taken by the Commission to the ECJ); and an HMRC ruling has confirmed the difference in VAT treatment of Bitcoin transactions across Europe.
The likelihood, then, is a continuing and uncertain to and fro between the demand of member states for sovereignty, and the desire of European institutions for single market efficiency.
And not just efficiency: when the EU commissioner for taxation remarks that ‘governments will have a new tool to facilitate VAT compliance, which should increase the revenues they collect’, it is well worth remembering that VAT collected by member states, contributes, as a matter of law, directly to the EU budget too. In 2010, VAT contributed €10Billion to the EU (11% of its total income).