The EU and VAT
Tax is a sensitive subject - nobody enjoys paying it, but it's necessary to provide us with essential state infrastructure and services.
We all pay tax one way or another, whether it’s taken directly from wages, paid in an annual tax return to Revenue or indirectly, added on to the price of goods and services in the form of Value Added Tax (VAT), stamp duties and the like. Direct taxes on earnings - our wages or company profits - directly affect how much we have to spend or save. Indirect taxes only affect us when we spend. Increasingly, countries prefer to tax indirectly on what we spend, rather than directly on what we earn.
VAT was introduced in Europe in the 1950s to replace a complex set of historical indirect taxes, make cross-border trade easier and eventually help pave the way for a Single Market.
Ireland adopted VAT in 1971 in preparation for joining the European Economic Community (EEC) in 1973 and all 28 national governments in the EU broadly align their rules for VAT within an agreed legal framework that sets out minimum and maximum rates.
VAT can potentially affect competition within the Single Market so it’s important that Member States agree common rules that are fair to all EU businesses and consumers. This is why the Member States originally agreed to standardise on VAT, and to keep VAT rates within an agreed band.
Each EU Member State decides exactly what VAT rate to charge within the agreed legal framework, meaning goods and services can have different VAT rates applied to them within the EU.
Ireland’s standard VAT rate is currently 23% but we also have reduced rates of 13.5% and 9%.
Under the EU legal framework Member States can apply a minimum tax rate of 15% to most supplies of goods and services.
However, reduced rates of at least 5% can be applied to certain goods and services, usually of a social or cultural nature.
Member States have also agreed not to apply VAT at a rate over 25% and they can seek approval from the European Commission to apply a reduced rate to supplies of natural gas, electricity and district heating.
Current VAT rules can distort competition in some sectors and can be overly complex for smaller companies, making it difficult for them to trade in the Single Market. Businesses in countries that charge lower VAT rates currently have a competitive advantage in cross-border sales (something the Single Market makes much easier). If the pre-VAT price of a product in countries A and B are the same, but country A charges a higher VAT rate, the product is more expensive in country A, and there's nothing the company can do about their national VAT rate.
This is particularly relevant when it comes to e-commerce and that’s one of the main reasons why EU Member States agreed to new VAT rules on the place of supply that were introduced in 2015.
New VAT rules
The EU Directive behind the new VAT rules on place of supply was actually agreed by Member States back in 2008. They currently only apply to telecommunications, broadcasting and electronic services, but the principle is intended to apply to all goods and services in future, marking a fundamental change in the way VAT is handled in cross-border sales.
The rules are partly aimed at preventing larger multinational companies gaining a competitive advantage by making their sales from countries with lower VAT rates. They are also intended to make operating within the Single Market outside their home country easier for smaller companies - currently, each new country a company trades in has its own VAT compliance regime, and the compliance costs per country usually start at €5,000 annually.
For example, Ireland has higher VAT rates than other Member States in some areas, which could put Irish companies at a disadvantage if a competitor based itself in a country with a lower rate. It is also a disadvantage to Ireland's multinational sector. Multinational companies based in Ireland and selling into the rest of the EU currently have to charge Ireland's (relatively) high VAT rate of 23%. This is a disadvantage when selling into large, lower-VAT markets such as the UK and Germany.
The European Commission is proposing to apply the new cross-border VAT rules to all e-commerce sales as part of its Digital Single Market Strategy.
This is designed to help cut costs, especially for smaller online companies selling in the EU Single Market, some of which currently face a VAT compliance cost of at least €5,000 annually for each Member State in which they trade.
Applying the new rules
Applying VAT to goods and services can be a complex issue, which sometimes makes it difficult for start-up companies and smaller businesses to export.
When it comes to cross-border, business to business (B2B) transactions, customers in the receiving Member State usually have to declare the invoice themselves and comply with the VAT policy in their own country under a system known as the reverse charge mechanism.
This hasn’t changed, but under the new rules VAT on sales to private customers is also charged at the rate of the Member State where the customer is based.
Before the rules were introduced private customers were charged VAT on goods or services at the rate applicable in the selling company’s country of residence.
The new rules mean businesses selling to private customers can no longer gain a competitive advantage over smaller rivals by simply relocating to a Member State with a lower VAT rate.
Despite broad support for the new rules, a number of small businesses that were previously exempt from VAT have faced difficulties with the changes.
The European Commission wanted to include a threshold for smaller companies in its original VAT proposals, but Member States rejected this.
The Commission has put forward the proposal again in an effort to support the EU's start up and smallest companies. A public consultation was also launched in September 2015 to help identify ways to simplify the Value-Added Tax (VAT) payments on cross-border e-commerce transactions in the EU.
A new system for businesses called the Mini One Stop Shop Method, or VAT MOSS, has been established to help businesses with the new VAT rules.
It’s an optional scheme that allows businesses to account for the VAT due on goods or services sold anywhere in the EU in their own Member State, and deal only with their own tax authority.
Otherwise, they’d have to register for VAT, file returns and make payments in every Member State they sell into.
In simple terms, a business registers for MOSS in one Member State and electronically submits quarterly returns for VAT on goods or services sold to private customers in other Member States.
These returns, along with the VAT paid, are then transmitted by the home Member State through a secure network to those other Member States.
The scheme can currently be used by taxable businesses or sole traders supplying telecommunication, broadcasting or e-services to non-taxable persons.
Businesses already registered in Ireland for the current VAT on e-services scheme (VOES) don’t need to go through the registration process for MOSS, as details will be migrated to the new system.