The European Commission has published a Green Paper On the future of VAT: Towards a simpler, more robust and efficient VAT system (COM(2010) 695/4 and a related Staff Working Document. Both documents are directed at possible significant reforms to the VAT system. The consultation period ends on 31 May 2011.
If there are changes that you would like to have made to the VAT system now is your opportunity to air them. You could email your thoughts directly to the Commission (at TAXUD-VAT-greenpaper@ec.europa.eu) or alternatively you could write to one of the representative bodies. The CIOT, IIT, ICAEW and ICAS are all proposing to make representations, possibly on a joint basis. CIOT has also prepared a questionnaire highlighting the relevant issues which can be found at www.lexisurl.com/zAIgX.
VAT on cross-border supplies within the EU
One of the main issues that the papers focus on is how VAT should be charged on cross-border supplies within the EU. The Staff Working Paper acknowledges that one of the benefits of the current system is that it enables member states to have different rules. However, it also observes that the resulting complexity may discourage trade in the EU. The papers suggest that there may be merit in suppliers accounting for VAT on intra-community trade. This change is partly recommended as a way of reducing MTIC fraud. Such a change will certainly make MTIC fraud more difficult on intra-community trade.
However, it will not impact on the possibility of fraud when goods and services are acquired from third countries. For that reason it must be questionable whether it will impact on the amount of fraud that is being committed. This in turn means that such a change is unlikely to impact on the due diligence checks that need to be undertaken on suppliers, since the dangers of a defaulting trader, who may not be the immediate supplier, will remain. If the destination principle of taxation is retained, any new system is also likely to be complex to administer. Particularly if there is no significant harmonisation in the tax rules, the benefits of such a charge must therefore be questionable.
The papers suggest that the treatment of public bodies needs to be reviewed in the light of privatisation and the distortions of competition caused by the current system. The papers also question whether all the exemptions should be retained. The papers observe that broadening the tax base will make the system more neutral and may help to reduce the tax costs of outsourcing. Harmonising rules may also assist cross-border trade because traders will have a greater certainty about the VAT consequences of transactions. However, especially if supplies are to be taxed at the standard rate, it will obviously increase the costs of some goods and services. One issue that the papers particularly focus on is the taxation of supplies of transport. However, the complex apportionments that may be required if all supplies of cross-border transport are taxed in a number of jurisdictions will clearly increase the burdens on transport businesses.
The administration and the payment of VAT
Some of the most controversial ideas considered in the papers relate to administration and the payment of VAT. In particular the papers suggest that there may be merit in introducing a split payment method, so that a component of each payment is made directly from the customer’s bank account to the tax authorities. The papers suggest that this will be a way to reduce fraud. However, since not all payments are subject to VAT at a standard rate, the system will presumably be dependent on what instructions are given to the customer’s bank. Especially if the supplier is potentially liable for the tax, suppliers may also be concerned about how they ensure that a customer has complied with its obligations. The Staff Working Document suggests that even an optional change will avoid the need for due diligence checks. However, this comment ignores the fact that HMRC frequently seek to rely on defaults by persons who are not the immediate supplier. It is therefore doubtful whether this alleged benefit will arise in practice. Other ideas for helping to detect fraud include providing tax authorities with details of transactions in real time or, alternatively, giving authorities access to a trader’s VAT data warehouse.
The papers suggest that it would be desirable to harmonise the VAT thresholds at which businesses need to register. The current rules are not very equitable. However, a reduction in the relatively high threshold in the UK is unlikely to be popular. A more welcome proposal is likely to be the suggestion that all business should be able to adopt cash accounting. It is clearly harsh to have to pay tax on sums that have not been paid. The papers also correctly observe that this proposal will simplify the VAT system, in particular it suggests that there will be less need for provisions relating to bad debt relief.
Businesses are also likely to welcome proposals to harmonise administrative procedures so as to make it easier for business to operate in a number of states. For similar reasons, the papers also suggest that it may be desirable to have a one-stop shop for accounting for VAT in the EU and also raise the possibility of introducing EU wide VAT groupings.
Opposition from Member States?
No doubt some changes may face opposition from Member States. However, as in the past, compromises will no doubt be made and agreements reached. If you have ideas for reform, it would clearly be sensible to air them now when the Commission is at a fairly early stage in considering its proposals. It will become increasingly difficult to achieve changes once these have been agreed in principle by the Commission and Member States.
Jeremy Woolf, Barrister, Pump Court Tax Chambers
The European Commission has published a Green Paper On the future of VAT: Towards a simpler, more robust and efficient VAT system (COM(2010) 695/4 and a related Staff Working Document. Both documents are directed at possible significant reforms to the VAT system. The consultation period ends on 31 May 2011.
If there are changes that you would like to have made to the VAT system now is your opportunity to air them. You could email your thoughts directly to the Commission (at TAXUD-VAT-greenpaper@ec.europa.eu) or alternatively you could write to one of the representative bodies. The CIOT, IIT, ICAEW and ICAS are all proposing to make representations, possibly on a joint basis. CIOT has also prepared a questionnaire highlighting the relevant issues which can be found at www.lexisurl.com/zAIgX.
VAT on cross-border supplies within the EU
One of the main issues that the papers focus on is how VAT should be charged on cross-border supplies within the EU. The Staff Working Paper acknowledges that one of the benefits of the current system is that it enables member states to have different rules. However, it also observes that the resulting complexity may discourage trade in the EU. The papers suggest that there may be merit in suppliers accounting for VAT on intra-community trade. This change is partly recommended as a way of reducing MTIC fraud. Such a change will certainly make MTIC fraud more difficult on intra-community trade.
However, it will not impact on the possibility of fraud when goods and services are acquired from third countries. For that reason it must be questionable whether it will impact on the amount of fraud that is being committed. This in turn means that such a change is unlikely to impact on the due diligence checks that need to be undertaken on suppliers, since the dangers of a defaulting trader, who may not be the immediate supplier, will remain. If the destination principle of taxation is retained, any new system is also likely to be complex to administer. Particularly if there is no significant harmonisation in the tax rules, the benefits of such a charge must therefore be questionable.
The papers suggest that the treatment of public bodies needs to be reviewed in the light of privatisation and the distortions of competition caused by the current system. The papers also question whether all the exemptions should be retained. The papers observe that broadening the tax base will make the system more neutral and may help to reduce the tax costs of outsourcing. Harmonising rules may also assist cross-border trade because traders will have a greater certainty about the VAT consequences of transactions. However, especially if supplies are to be taxed at the standard rate, it will obviously increase the costs of some goods and services. One issue that the papers particularly focus on is the taxation of supplies of transport. However, the complex apportionments that may be required if all supplies of cross-border transport are taxed in a number of jurisdictions will clearly increase the burdens on transport businesses.
The administration and the payment of VAT
Some of the most controversial ideas considered in the papers relate to administration and the payment of VAT. In particular the papers suggest that there may be merit in introducing a split payment method, so that a component of each payment is made directly from the customer’s bank account to the tax authorities. The papers suggest that this will be a way to reduce fraud. However, since not all payments are subject to VAT at a standard rate, the system will presumably be dependent on what instructions are given to the customer’s bank. Especially if the supplier is potentially liable for the tax, suppliers may also be concerned about how they ensure that a customer has complied with its obligations. The Staff Working Document suggests that even an optional change will avoid the need for due diligence checks. However, this comment ignores the fact that HMRC frequently seek to rely on defaults by persons who are not the immediate supplier. It is therefore doubtful whether this alleged benefit will arise in practice. Other ideas for helping to detect fraud include providing tax authorities with details of transactions in real time or, alternatively, giving authorities access to a trader’s VAT data warehouse.
The papers suggest that it would be desirable to harmonise the VAT thresholds at which businesses need to register. The current rules are not very equitable. However, a reduction in the relatively high threshold in the UK is unlikely to be popular. A more welcome proposal is likely to be the suggestion that all business should be able to adopt cash accounting. It is clearly harsh to have to pay tax on sums that have not been paid. The papers also correctly observe that this proposal will simplify the VAT system, in particular it suggests that there will be less need for provisions relating to bad debt relief.
Businesses are also likely to welcome proposals to harmonise administrative procedures so as to make it easier for business to operate in a number of states. For similar reasons, the papers also suggest that it may be desirable to have a one-stop shop for accounting for VAT in the EU and also raise the possibility of introducing EU wide VAT groupings.
Opposition from Member States?
No doubt some changes may face opposition from Member States. However, as in the past, compromises will no doubt be made and agreements reached. If you have ideas for reform, it would clearly be sensible to air them now when the Commission is at a fairly early stage in considering its proposals. It will become increasingly difficult to achieve changes once these have been agreed in principle by the Commission and Member States.
Jeremy Woolf, Barrister, Pump Court Tax Chambers
