Simpler EU VAT rules could boost trade and growth

Report says half of Europe’s businesses feel they do not operate in a business-friendly environment.

Economic growth is a key concern across the EU at the moment and therefore a recurrent element in your articles. An important step that should be encouraged is the removal – or lowering – of barriers to trade within the internal market, one of which is value-added tax. 

With growth in mind, and since the European Commission is likely to make legislative proposals about VAT, your readers might be interested in the latest Global Enterprise report by the Institute of Chartered Accountants in England and Wales.

The report found that half of Europe’s businesses feel they do not operate in a business-friendly environment, and one of the factors that discourage so many EU businesses from trading with other businesses within the Union is the EU’s rulebook on VAT.

The EU’s VAT system is now outdated and complex. A common VAT system has existed since 1967, when the members of the then European Economic Community agreed to extend their national tax systems by introducing a harmonised VAT regime. While the VAT system was revamped in 1993, when the single market was introduced, it is in desperate need of another revision. The Commission has acknowledged this, recently consulted on what can and should be done, published a green paper on VAT in December 2010, and is likely to follow that up with legislative proposals.

A few changes could make the system considerably simpler and more coherent.

Firstly, reducing the current three sets of rules for VAT compliance in the EU to two, with one category for international supplies and one for domestic supplies, within which trading within the single market should fall. This would mean that businesses would not have keep tabs on where all their customers are located, their VAT number and the relevant VAT rates.

Secondly, abolishing the requirement to register for and maintain a VAT registration in other member states by adopting the ‘origin principle’, as this would mean businesses would only relate to the VAT rules and rates in their home country

Thirdly, improving the VAT return system by introducing a standard format for identifying tax incurred that can also be submitted electronically.

Fourthly, eliminating the complex set of exemptions to VAT.

Ian Young 

Institute of Chartered Accountants in England and Wales (ICAEW) 

London

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