Suddenly, the UK feels very close to EU exit.

A Conservative election victory next year, a vote against continued EU membership in Cameron’s promised 2017 referendum, and it’s all over.  So perhaps the really serious VAT question that we in the UK now need to ask is: what will happen to the indirect tax system if we leave the EU? It’s a huge question.

In the meantime, there are other things to consider: what, for instance, are the immediate implications for European VAT of the drama of the last few weeks? How will Juncker’s Commission differ from Barroso’s? What will be the timetable for VAT harmonization and standardization?

A few weeks ago, I blogged about a letter I received from HMRC setting out the UK’s current position on the Standard Return. The letter was cagey, but at least one principle was made clear: that the UK was against adding to the overall compliance burden of UK taxpayers, and was wary of the Standard Return for that reason.

The problem about the Standard Return for the UK is precisely that it is standard, one-size fits all. Though the return has been designed to reduce the hassle of reporting cross-border transactions and paying foreign VAT, it will have to be adopted by all taxpayers, irrespective of whether they trade outside their member state of origin. So, there is a potential cost implication (adapting to the new system) and a political issue too: persuading domestic opinion of the value of the new European standard.

On the face of it, Jean Claude Juncker is the very worst Commissioner the UK could have to deal with during this process. He is the ‘arch-federalist’; he has been planning a ‘United States of Europe’ his whole political life; he was an architect of the Euro; he holds the UK in contempt: and he’s in charge. Surely we can expect Juncker to press on with the project relentlessly. If there is to be a genuinely single market, a simplification of the indirect tax system must be a prerequisite. Given Cameron’s bitterly spectacular failure to block Juncker, the UK can expect no mercy.

Jean Claude Juncker has been planning a ‘United States of Europe’ his whole political life

We know that EU mandarins are already restless about the slow pace of change in European tax matters. Just a couple of months ago, Algirdas Šemeta (Commissioner responsible for Taxation and Customs Union, Statistics, Audit and Anti-fraud) broke cover and declared his opposition to the continuation of the unanimity principle in tax decision making: ‘Let me open a parenthesis here on the issue of unanimity in taxation. The reality of our decision-making process is that the convoy currently moves at the pace of the slowest ship. We have to ask whether that is sustainable in the long-term’.

Cameron wanted to resist Juncker’s coronation partly because it undermined the fundamental principle of unanimity. Juncker’s mandate, such as it is, comes from the European Parliament; Cameron wanted a Commissioner unanimously accepted by the Council of Ministers – the democratically elected leaders of individual member states (all previous Commissioners had been chosen in this way).

If the unanimity principle is abandoned for the process of choosing European leaders, how long before momentum to abandon it for tax decision-making becomes unstoppable? More pressure for Cameron. Especially when everyone has an opinion about how other member states should conduct their tax affairs. Just last month the European Council itself advised the UK to broaden its tax base:

The United Kingdom has a high level of foregone taxes, particularly with regard to indirect taxation. According to the Convergence Programme, the debt- to-GDP ratio is projected to increase to 93.1% in 2015-16 before falling back to 86.6% in 2018-19. The United Kingdom’s macroeconomic scenario underpinning the budgetary projections in the programme is plausible. Potential risks to the budgetary projections stem from lower-than-expected growth due to constrained wages curtailing private consumption and uncertainty hindering investment.

Translated into Human, this means that the Council recommends the UK stops ‘foregoing’ indirect taxes. Translated into action, this would mean giving up, for example, the zero VAT rate for children’s clothes. And it’s not just the Council – even the IMF is badgering the UK government about bringing its VAT rates into line with the rest of Europe, and getting rid of exemptions.

If the unanimity principle is abandoned for the process of choosing European leaders, how long before momentum to abandon it for tax decision-making becomes unstoppable?

So, the VAT situation looks like it could get very tricky for the PM. But, there’s a twist in the tale. Juncker may have the reputation of being an arch-federalist, but his behavior as Prime Minister of Luxembourg was not always obviously compatible with the European Dream. In fact, militant EU tax harmonizers have never forgiven Juncker for resisting reform of the EU VAT system in order to protect the interests of the Grand Duchy of Luxembourg:

Luxembourg on Tuesday vetoed attempts to end its position as a low-tax haven for online retailers, blocking value added tax reforms that were proposed by the German presidency of the European Union and backed by all other member states.

Jean-Claude Juncker, Luxembourg’s prime minister, refused to give up a tax regime which has attracted companies including AOL, iTunes and Ebay to the grand duchy, yielding his government up to €300m ($400m, £200m) a year in revenues.

The act of defiance has infuriated other member states, which are losing jobs and tax revenues because of the shift offshore of the booming e-commerce sector.

This is from the Financial Times of June 5th, 2007 . It will only be at the beginning of 2015 that the position is finally regularized across Europe, and that Luxembourg falls into line.

Can Juncker be the man to push the great European VAT reform?

By |July 9th, 2014|