On 18 January 2018, the European Commission published legislative proposals to amend EU VAT law in relation to VAT rates and small and medium enterprises ("SMEs"). A separate proposal to counteract VAT fraud was issued on 8 March 2018. These proposals form part of the Commission’s VAT Action Plan, launched in 2016, which aims to make the EU’s VAT system simpler and more business friendly. The proposals will be discussed at the European Council and must be agreed by all Member States before being adopted. It is therefore possible that the proposals will change significantly or might not be adopted in whole or in part. The key aspects of the proposals are summarised below.
These proposals would give Member States wider scope to apply reduced VAT rates to supplies of goods and services in their jurisdiction. Currently, Member States’ scope to apply reduced rates of VAT is limited to supplies of goods and services set out in the EU VAT Directive. In addition, reduced rates which had been in place in a Member State prior to 1991, can be retained by that Member State where certain criteria are satisfied.
It is proposed that Member States would be allowed to apply reduced rates to supplies of any goods and services, apart from specific exclusions. This proposed list of exclusions includes excisable goods and consumer products (e.g. electronics). If adopted, these proposals would allow Ireland to apply its reduced VAT rates to a wider range of goods and services than is currently the case, subject to domestic budgetary constraints and the overall weighted average VAT rate remaining above 12%.
These proposals aim to reduce or relieve the VAT compliance obligations for smaller businesses. The proposals include permitting Member States to set a VAT registration threshold based on a supplier’s turnover of up to €85,000 per annum. Currently, Member States are required to maintain their existing thresholds (which are typically lower than €85,000) with only minor adjustments for inflation.
In Ireland, the current VAT registration thresholds are €37,500 and €75,000 (depending on whether the supplier is principally involved in supplying goods or services), and therefore these thresholds could be increased if the proposals are approved. It is also proposed that a supplier who is not established in a Member State could also avail of the VAT registration threshold in respect of their supplies in that Member State, where that supplier’s total annual turnover within the EU is not higher than €100,000 per annum. Currently, suppliers not established in a Member State must register for VAT where they make any supplies on which they are accountable for VAT in that Member State.
A further proposal is to allow a transitional period of one year, where businesses which exceed the VAT registration threshold can remain unregistered provided their turnover does not exceed the threshold by more than 50% during that transactional period. The Commission also proposes to introduce simplified VAT administration obligations for businesses with turnover of less than €2 million per year. These proposals include measures such as allowing annual VAT return filings and simplified rules for the storage of invoices.
VAT fraud is a significant issue costing the EU’s economy billions of euro every year. The EU VAT Directive allows Member States to apply the reverse charge VAT mechanism to certain domestic transactions which are prone to fraud, but this provision is due to expire on 31 December 2018. The Commission proposes to extend this deadline. The reverse charge mechanism reduces the risk of fraud as the recipient of the supply is liable to account for the VAT, rather that the supplier. This reduces the risk of the supplier charging VAT but not remitting it to the tax authorities. The Commission is expected to issue further proposals to counteract VAT fraud in the second quarter of 2018.
The Court of Justice of the EU (“CJEU”) issued a number of judgments in relation to VAT in recent months. These decisions largely build on existing CJEU case law, rather than setting any new precedent, but are nonetheless worth noting.
The Stadion Amsterdam (C-463/16) judgment adds to the existing body of case law on whether a mixed package of goods or services is a composite supply or a multiple supply. Where the package is regarded as a composite supply, the VAT rate of the principal element applies to the overall package. With a multiple supply, by contrast, the package price must be apportioned between the various components and VAT applied at the appropriate rate to each component.
In this case, customers paid a single price for a stadium tour which included entrance to the stadium museum. Entrance to a museum would have ordinarily qualified for a reduced rate of VAT, but in this case the museum could only be accessed by buying the stadium tour. The CJEU concluded that there was a composite supply, with the stadium tour being the principal element of that supply. Consequently, the VAT rate applying to the stadium tour was applicable to the full ticket price.
The decision in Kreuzmayr (C-628/16) considered the criteria for the 0% VAT rate to apply to cross-border intra-EU sales of goods. This is an issue that has been considered before by the CJEU on a number of occasions, but still gives rise to complexity. The case considered a scenario where a German seller of goods applied 0% VAT to a sale, on the understanding that its customer would transport the goods to Austria.
However, that customer in fact sold the goods to another party before they left Germany. Unsurprisingly, the Court held that the 0% VAT rate could not apply to the first sale, as it was not a cross-border sale. The sale should instead have been subject to the normal German VAT rate applicable to the goods. This judgment highlights the need for cross-border sellers to ensure they have obtain sufficient proof of the goods having actually left the country in order for the 0% rate of VAT to apply.
In the Imofloresmira (C-672/16) case, the CJEU concluded that the Portuguese tax authorities were not entitled to clawback input VAT reclaimed on the purchase of a property, where the owner intended to let out the property under VATable leases, but which had remained vacant after two years. Crucial to the CJEU’s decision was that the owner had objective evidence of ongoing efforts to find a tenant and had not used the property for any VAT exempt or non-business activity in the meantime.
If you would like to discuss this further, please contact David Duffy or any member of the KPMG’s VAT team.
This article originally appeared in the April 2018 edition of Accountancy Ireland and is reproduced here with their kind permission.