Value Added Tax

June 2013 Update

In December 2011, the Commission adopted a Communication on the future of VAT setting out the characteristics for the establishment of new restructured VAT regime.

One of the priority actions is a review of the current VAT rates structure, based on the following guiding principles:
•    Abolition of those reduced rates which constitute an obstacle to the proper functioning of the internal market.
•    Abolition of reduced rates on goods and services whose consumption is discouraged by other EU policies (i.e services harmful to the environment, health and welfare)
•    Similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect, so that the challenge of convergence between the on-line and the physical environment is addressed.

In order to gather feedback from external stakeholders, in October 2012 the Commission launched a three month public consultation.

The Commission received a total of 333 contributions to that consultation. The report highlights that certain economic sectors, not specifically targeted by the consultation, submitted contributions defending the existing reduced rate applicable to their sector of activity. This is notably the case for accommodation and restaurant services and suppliers of food products.

The Commission’s objective is to broaden the tax base where possible and is looking for evidence that certain reduced rates will either distort the Internal Market or incentivise behaviour which is contrary to European policy objectives on sustainability and the environment The majority of respondents to the Commission’s consultation said that they were not aware of examples where reduced VAT rates were causing distortions in the Internal Market.

April 2013 Update

The Commission is now in the process of completing an impact assessment on reform of the reduced rates structure. This assessment should be finalised by summer 2013, followed by a proposal by the end of the year.

As a sector that enjoys the benefits of a potential reduction of reduced rate IAAPA is monitoring closely the policy developments in this respect. In relation to the individual sectors that can apply a reduced rate through the annex to the VAT Directive, the Commission is taking a straight forward approach: unless it can be demonstrated that there is a conflict between a reduced rate and Commission policy objectives, in particular on the environment, or that a reduced rate produces a distortion of cross-border competition, it does not intend to remove sectors to the annex.

Click here to access the timeline of the legislation and the Commission’s consultation document on reduced rates.

November 2012 Update

The European Commission has set out its timeline for new legislation on the structure of VAT rates. Over the course of the next 12 months, the Commission will look at reduced rates applied by Member States with a view to adopting a proposal at the end of 2013. The Commission’s objective is to reduce the number of reduced rates in an effort to broaden the tax base and ensure consistency with policies designed to incentivise sustainable purchasing decisions. Click here for the Commission’s consultation document on reduced rates and here for the Commission’s roadmap on reduced rates which sets out the rationale for the work.

April 2011 Update

Further details of this green paper which the Commission has put out for consultation until the end of May.

The document is essentially strategic, looking at the tax from an EU perspective and examining its role in the functioning of the European single market. A copy can be found here.
Much of it is technical and aimed at an audience of tax experts familiar with concepts such as the place of taxation (origin or destination). Other sections deal with the 'neutrality' of the VAT system and the need 'to establish a solid, simpler and more efficient VAT system for the single market' (including businesses' accounting obligations, reductions in red tape etc.).

VAT rates

Of particular interest from an IAAPA point of view is the short section on rates of VAT.

According to the green paper, "it has long been argued that the application of a single VAT rate to all goods or services would be an ideal solution from the point of view of maximising economic efficiency. At the same time, the use of reduced rates as a policy instrument is often advocated notably for health, cultural and environmental reasons to provide easier and more equal access to educational and cultural content and incentives for eco-innovation and knowledge-based resource-efficient growth."

There is no reference here to the relationship between lower rates of VAT and job creation or economic development, or between them and social policy aims (such as making holidays more affordable for people on lower incomes). This is a dry discussion on market economics. "The current variation in the standard rate in the EU and the reduced rates applied by some member states do not seem to disrupt the single market."

While at no point referring specifically to reduced rates of VAT on tourism services (accommodation, restaurant services, admission to visitor attractions), the green paper does refer to reduced rates generally, pointing out that "there are still inconsistencies in the VAT rates applied to comparable products or services". The example it cites is the differing treatment of print media and e-books within member states, but as the tourism industry knows, the inconsistencies also apply to the VAT rates levied on the same services by different member states. Some apply reduced rates to tourism services; some do not.

The text then asks whether

• the 'current rates structure creates major obstacles for the smooth functioning of the single market (distortion of competition), unequal treatment of comparable products…[etc.]'.

• whether consultees would prefer to have no reduced rates (or a very short list of eligible products and services) which might enable member states to apply a lower standard VAT rate. Or whether they would support a compulsory or uniformly applied reduced VAT rates list in the EU.

These are important issues, not least given the importance to visitor attractions in many member states of being able to charge reduced rates of VAT on their admission prices.

The green paper also raises the question of VAT on public transport, which is exempt in several member states for largely historical reasons. Does the current system create problems in terms of tax neutrality or for other reasons? Should VAT be applied to passenger transport irrespective of the means of transport used?

February 2011 Update

The European Commission has published a green paper (consultation document) on the future of VAT in the European Union. Its ultimate aim is to 'strengthen' and 'improve' the EU's VAT system "to the benefit of citizens, businesses and member states.

The EC press release adds:

"The complexity of the current VAT system creates unnecessary costs and burdens for taxpayers and administrations, and obstacles to the internal market. Moreover, certain weaknesses within the VAT system leave it vulnerable to fraud and evasion. Therefore, a fundamental review of the VAT system is needed."

The deadline for responses is 31st May.

Much of the paper deals with top-level, strategic issues in the operation of the VAT system, but other issues of more immediate relevance to businesses include:

- The application of reduced VAT rates (very important for amusement parks).

- VAT exemptions (eg on passenger transport)

- Cutting red tape in VAT transactions.

The Commission also stresses its interest in hearing from consultees about other aspects of VAT policy that particularly concern them.

IAAPA Europe will study the green paper closely and consider how best to represent the industry's interests and concerns to the Commission.

May 2009 Update
All EU member states will soon be entitled to apply reduced rates of VAT to restaurant and catering services. These powers are included in a new reduced-rate VAT directive published by the EU on 9th May.flags

Contrary to the original Commission proposal, the new directive allows member states to apply the reduced rates to drinks (alcoholic and non-alcoholic) served with meals. However, it also allows them to decide not to do so.

Some countries have, of course, long been able to apply lower rates of VAT to their restaurants and catering services, but this was the result either of long-lasting national arrangements that predated older EU directives or of temporary powers granted to the countries that joined the EU in 2004. Now all countries have the right to make these rate reductions.

The change is part of a wider directive that allows member states to apply reduced rates more generally to local, labour-intensive services. Such services include minor repairs, window cleaning, the supply of books and newspapers and hairdressing.

The directive - no. 2009/47/EC - takes effect on 1st June 2009. IAAPA Europe members should note, however, that the directive does not oblige member states to apply reduced rates of VAT to the services it covers. It merely authorises them to do so if they wish.

March 2009 Update
Member states meeting in the Economic and Financial Affairs Council in Brussels on 10th March have agreed on proposals to make permanent the reduced rates of VAT which apply to "labour-intensive services" in the EU. Many of these rates had been introduced as part of an experiment to see whether or not imposing lower rates of VAT would help to generate employment.

Considering the need for unanimity among all 27 countries, the Counci's agreement is no mean achievement. And the good news is that the list of labour-intensive services has been expanded to include restaurant services. All countries of the EU will be entitled to apply reduced rates of VAT to restaurant meals in the future and not just those which had retained the right to do so from the days before rate policies were set at European level.

For the moment, however, we have no more than political agreement on the proposal tabled by the European Commission. A committee is to be set up under the current Czech presidency of the EU to draw up the final legislative text that will implement this agreement. One of the issues that this committee will have to deal with is whether or not to apply the reduced rates on restaurant meals to the alcoholic drinks that are served with them. The EC's original proposal was that the rate on such drinks should not be reduced.

Note that reduced rates of VAT will not automatically apply to restaurant meals across the EU in future. It will be left entirely to national governments to decide whether or not to implement them. It is a safe bet that many countries will not do so.

IAAPA Europe will keep members informed of progress with this proposal. Now that political agreement has been reached, we must hope that the detail can be worked out quickly.

Debate on the much bigger question of the overall future of reduced-rate policy - see the December 2008 newsletter - will continue once the labour-intensive services issue has been resolved once and for all.

December 2008 Update
The European Commission has published a new proposal which would grant all EU member states the right to apply reduced rates of VAT to restaurant meals from 2011. These rates would apply only to meals; alcoholic drinks would be excluded.

The proposal - which also covers a much wider range of "local" labour-intensive services - was considered by European heads of state and prime ministers meeting in the European Council in Brussels on 12th December. They referred it back to national finance ministers in the EU's Economic and Financial Affairs Council, asking for a decision to be made before March 2009.

As with all tax policy discussions at European level, a unanimous vote in favour is needed for the new proposal to be approved and implemented. If one country votes against, the proposal fails. It is already clear that the debate has been a difficult one.

The European Parliament has no voice beyond the right to be consulted and to offer its views.

Once this issue has been resolved, the European Commission is pledged to resume consideration of the future of reduced-rate VAT policy generally. This is a subject of particular concern to IAAPA as visitor attractions in many EU countries benefit from reduced rates of VAT on their admission prices - a concession made possible by the current VAT directive, which dates from 2006.

The Commission held a public consultation on reduced-rate VAT policy earlier this year. Read a summary of IAAPA Europe's response here.