The European Commission has proposed new rules to give Member States greater flexibility on setting VAT rates and extend exemptions to a wider range of supplies.

The Commission’s proposals are intended to make the VAT rate setting process more flexible. To do this, the following measures have been put forward which could be applied by all Member states:

  • A minimum standard VAT rate at 15%;
  • Two separate reduced rates of between 5% and the standard rate chosen by the Member State;
  • One exemption from VAT (or 'zero rate');
  • One reduced rate set at between 0% and the reduced rate.

However, in order to protect revenues, the average VAT rate in each country will have to be 12%.

Furthermore, under the current rules Member States can exempt from VAT the sales made by small businesses provided they do not exceed a given annual turnover. These exemptions are generally only available to domestic companies though and hence there is no level playing field for small companies trading across the EU. To help SMEs trading in the EU, the Commission is also proposing to introduce the following:

  • A €2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures, whether or not they have already been exempted from VAT;
  • The possibility for Member States to free all small businesses that qualify for a VAT exemption from obligations relating to identification, invoicing, accounting or returns;
  • A turnover threshold of €100,000 which would allow companies operating in more than one Member State to benefit from the VAT exemption.

If adopted by the Council, and after confirmation is received from the European Parliament and the European Economic and Social Committee, the amendments will become effective when the switch to the definitive regime effectively takes place. At this stage though, the date of that is unknown.