EU VAT in the digital age – what the changes mean for UK businesses
Alison Horner · January 5th 2023 · read
Important changes to the future of VAT in the EU – impact for UK businesses
The EU Commission have made some very significant proposals about the future of ‘VAT in the digital age’. Once ratified some of the quick fixes will be implemented soon after with the remaining proposals phased in over the next 5 years.
The proposals will have a big impact for UK businesses trading with and within the EU and all should be aware of the potential changes to come.
VAT in the digital age - 3 key changes
The proposals have 2 aims: tackling fraud; and promoting digitalisation. Those aims are to be achieved with 3 key changes:
- A new real-time digital reporting system based on e-invoicing
- Updated VAT rules for the platform economy
- A single VAT registration for businesses selling to consumers across the EU
Real-time digital reporting for businesses that operate cross-border in the EU
The aim is to give Member States information to fight VAT carousel fraud with the ambitious target that e-invoicing will reduce VAT fraud by up to €11 billion a year as well as bringing down compliance costs for EU traders by over €4.1 billion per year. It will also cause existing national systems to converge across the EU and paves the way for Member States that wish to set up national digital reporting systems for domestic trade in the coming years.
Real-time reporting is the future of VAT, most likely followed closely by real-time VAT collection and payment to the tax authorities in some cases. Large scale fraud nearly destroyed the EU VAT system – at one point it was estimated to be costing over 11% of all VAT revenues in the EU as recently as 2017.
Updated VAT rules for passenger transport and short-term accommodation platforms
Under the proposal, platform economy operators in these sectors will become responsible for collecting and remitting VAT to tax authorities when their users do not, for example because they are a small business or individual providers. This will ensure a uniform approach across all Member States and contribute to a more level playing field between online and traditional short-term accommodation and transport services.
This is the most interesting technical feature of the proposals and is aimed at tech giants such as Uber and Air B’n’B (both are mentioned by name in the Final Report) who provide easy access to transport and accommodation but as intermediaries rather than identifying themselves as the supplier. In the UK, Uber have been obliged to treat themselves as principals, partly as a response to losing a worker’s rights case brought by some of their self-employed drivers. Air B’n’B is a disclosed agent – customers buy stays from the accommodation owner, many of whom trade below the VAT registration threshold. It will be interesting to see if the UK follows the EU’s lead in creating a deemed supplier position for this sort of platform. It would be welcomed by VAT registered competitors i.e. the traditional hotel sector, but not welcomed by the operators or the general public with the increased cost of VAT.
The introduction of a single VAT registration across the EU
Building on the existing ‘VAT One Stop Shop’ model, the proposals would allow businesses selling to consumers in another Member State to register only once for VAT purposes for the entire EU, and to fulfil their VAT obligations via a single online portal in one language. Further measures to improve the collection of VAT include making the ‘Import One Stop Shop’ mandatory for certain platforms facilitating sales to consumers in the EU.
Whilst changes in July 2021 extended the use of one-stop shop registrations for B2C supplies of many goods and services by EU suppliers, it still left many gaps which still leave suppliers open to obligations to register in multiple countries. These include:
- Goods that are physically supplied in the Member State of destination, i.e. domestically, such as supplies with installation and assembly.
- B2B2C triangular transactions
- Exports from a member state where the supplier is not established
- B2B supplies of services where the reverse charge does not apply
- Intra-EU movements including transfer of own goods
One of the major shortcomings of the existing one-stop shops is that no retrospective registration is permitted. Suppliers who have missed the boat, often face huge compliance costs with historic registrations in many countries. It’s not clear that the Commission have recognised that in this otherwise welcome proposal.
The proposals will amend EU VAT legislation and will now be sent to the Council for adoption before going to the EU parliament and the Economic and Social Committee for consultation.
The proposals will be implemented in stages; some of the quicker fixes will come in as soon as the directive is formally adopted. It is anticipated that other changes will be implemented over the next five to six years.
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