Europe proposes new ‘single VAT area’ for intra-EU supplies of goods

05 May 2016

The European Commission has published a VAT Action Plan presenting a selection of measures to modernise VAT in the EU. This includes a proposal for a complete redesign of the VAT treatment of goods supplied between businesses in different EU member states. 

Practical changes are likely to be a few years away, but the plan looks set to significantly change how cross border traders do business. 

The current system

At present, B2B supplies of goods between EU member states are zero-rated at the time of dispatch, with VAT accounted for by the purchaser in the country of destination. The purchaser accounts for VAT as ‘acquisition tax’ on their VAT return in the country of receipt, which is simultaneously recovered. The current system has been in place since 1993 and has proved to be vulnerable to missing trader fraud.

The new ‘Single VAT Area’

The European Commission now proposes to introduce a Single VAT Area, under which:

  • VAT will be charged by the vendor in Country A (the country of origin), but at the rate applicable in Country B (the country of consumption/destination) 
  • The VAT is declared and paid by the vendor in Country A via a web portal, through which the VAT will be paid over to the tax authorities in Country B.

How will this affect Intra-EU trade in goods?

The Action Plan looks at the issue at a high level, and the full implications will not be clear until the detailed proposal is published next year. However, the main change is that intra-EU dispatches of goods can no longer be zero-rated by the supplier at the time of sale. This will have cash flow implications for the buyer, who will be required to pay VAT on the goods at the time of purchase, instead of making a ‘nil net tax’ adjustment on their next VAT return.

No firm implementation date has been set and the Action Plan suggests introduction will be gradual: the Commission says it will publish a full proposal for the Single VAT Area in 2017. UK businesses buying and selling goods within the EU should review the proposal and watch for further announcements from the Commission.