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Wednesday, 07 March 2018

European Union proposes loosening of VAT restrictions

On 18th January 2018, the European Commission proposed new rules to allow member states more flexibility in setting VAT sector specific rates and creating a tax environment better suited to allowing SMEs to prosper. These proposals are the final stages of a European effort to combat VAT fraud. These proposals will become law if they are approved by the European Parliament and Council.

The proposals follow an EU acknowledgement common VAT rules, agreed in 1992, are out of date and overly restrictive. They allow reductions on only a small selection of services and products.

Aimed at reducing the VAT pressures on SMEs and preventing fraud, they will free up bespoke rates previously controlled at a higher European level. The new regulation will allow:

• 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 rates

This would mean that the government could have more reduced rates that the current 20%, 5%, and 0% rates, allowing more intuitive policies to benefit various sectors.

The changes also propose a simplification of VAT to alleviate the burden on small businesses. While the current exemption thresholds decided by member states would remain in place, there would be a €2 million revenue threshold across the EU, below which businesses would benefit from simplification measures, regardless of whether they are above the threshold. Further to this, the proposals would allow member states to free those businesses that qualify for an exemption from obligations relating to invoicing, accounting or returns.

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