Digital age VAT in the EU – reforms on the way

Digital age VAT in the EU – reforms on the way

The European Commission has launched its long-awaited proposals to modernise the VAT rules within the EU collectively known as the ‘VAT in the Digital Age package’ (ViDA). These could have a significant impact on UK businesses trading across the EU from 2025 onwards.  

The ViDA proposals consist of three key parts, commonly referred to as:

  • The Platform economy
  • The Single VAT registration
  • Digital reporting and E-invoicing.

As part of the consultation process, in July 2023, the European Parliament has suggested around 300 amendments are made to the draft legislation. The European Commission will now consider the suggestions made by the Parliament and may then suggest changes to the draft legislation, before a final vote by member states on the VITDA package. The recent proposals from the European Parliament have also suggested delaying the implementation date by a further two years. 

From 1 January 2025, the EU is proposing a number of changes to reduce VAT compliance cost and the administrative burden of cross border trade within the EU.

There is to be a mandatory reverse charge rule for supplies of goods and services for all intra-Community B2B supplies where:

  • The supplier is not established in the Member State in which the VAT is due, and
  • The purchaser/recipient is VAT registered in that latter Member State, and
  • The supplies do not fall within a margin scheme.

The VAT one-stop-shop (OSS) is to be extended to cover B2C-supplies of goods including domestic supplies, installation or assembly supplies, supply of goods on board of ships, aircrafts or trains and supply of gas, electricity, heating and cooling.

There will be new rules for Platforms trading across the EU. They will be the “deemed supplier” for all supplies of goods within the EU facilitated by them (they will be treated as having received and supplied those goods). This includes both B2C supplies of goods within the EU by EU-businesses operating on the platform and B2B supplies. Platforms that are established in one EU Member State and only facilitate supplies in that State will not fall within the “deeming provision”.

All Platforms must use the OSS and, in all cases, where the Platform is a “deemed supplier”, records must be kept about the suppliers whose sales the Platform has facilitated. This includes the name, postal address and electronic address or website of the supplier, its VAT registration or tax ID number and its bank account.

Call-off stock arrangements at present causes difficulties – placing stock within a member state prior to the goods being sold. In many cases, a VAT registration is needed to invoice and report the eventual sales and deal with imports/intra EU VAT. These rules will be abolished from 31 December 2024 although goods supplied under pre-existing arrangements can continue with the regime until 31 December 2025. As a result of the wider changes proposed to the OSS and the reverse charge rules, it should be possible to avoid a VAT registration and deal with the reporting of the movement and sales to businesses and consumers in other ways.

Second-hand goods supplied under the margin schemes, works of arts, collector’s items and antiques will be subject to distance selling rules making them subject to VAT in the Member State of arrival of the goods. If works of art or antiques are not transported or dispatched or the transport starts and ends in the same EU Member state the supply will be subject to VAT where the customer is established, has its permanent address or usually resides.

Starting from 1 January 2025, a “deemed supplier” rule for Platforms is to be introduced for short-term accommodation rental (up to 45 days) and passenger transport in situations where the underlying supplier does not charge VAT, for example, because it is a non-taxable person or it uses the exemption for small businesses.

How it will work

  1. The supply of the underlying supplier (landlord/travel company) to the Platform shall be regarded as “exempt” without a right to deduct VAT.
  2. The Platform will charge VAT on its supply because it is deemed to make the supply to the customer (and to receive it from the supplier).
  3. The supply by the Platform for which it is a “deemed supplier” (i.e., to the end customer) will be taxed.
  4. The facilitation service provided by the Platform to the supplier operating on the Platform is to be regarded as an intermediary service where the recipient of the supply is a non-taxable person.

As this will only apply where the landlord or travel company is not registered for VAT, the net effect is to ensure that VAT is always charged on such services – the key aim of the proposal is to level the playing field for all businesses in these sectors.

Small, unregistered businesses will therefore suffer the effects of VAT without the right to recover it on their input costs for providing the underlying service. However, they can opt to voluntarily register for VAT if they wish to.

 July 2023 update

The period of uninterrupted rental of accommodation to which the “deemed supplier” rule for Platforms would apply has been proposed by the European Parliament to be reduced from 45 days to a maximum of 30 days. It has also been recommended that small online travel agencies, small suppliers of short-term rental accommodation, hosts and VAT-exempt businesses should be excluded from the deemed supplier scheme. 

From 1 January 2028, the EU proposals would create mandatory e-invoicing and a two working day digital reporting requirement for all intra-Community B2B supplies to help reduce missing trader intra-Community (MTIC) VAT fraud.

Key features of the proposed system

  • B2B intra-Community invoices will be electronic.
  • The deadline for issuing invoices for intra-Community supplies or for which the reverse charge rule applies is set at two working days after the chargeable event takes place. Additional data is to be included in the invoice to ensure the use of the electronic invoice to automate the process of reporting.
  • A new central VIES system for intra-Community transactions will be set up, which will provide information on a transaction-by-transaction-basis. Taxable persons must report on the transaction using this central system within two working days of issuing the e-invoice to their domestic Tax Authority. If the data is not transmitted or does not contain the correct information, the exemption with credit/zero rating for intra-Community supplies cannot be applied.
  • The information collected by the domestic Tax Authority must be transmitted within one day after the collection to the central VIES system. The information remains available within the central VIES system for five years.
  • It will no longer be possible to issue summary invoices.
  • Recapitulative statements, such as EC Sales Lists and Intrastats will be abolished, as instead the Digital Reporting Rules will provide information to Member States.
  • Use of paper invoices is only permissible where EU Member States directly authorise the use of them.

Taxable persons will always be allowed to issue electronic invoices (this will apply as of 1 January 2024).

 July 2023 update

The deadline for issuing invoices for intra-Community supplies or for which the reverse charge rule applies has been proposed by the European Parliament to be extended to ten working days after the chargeable event takes place, rather than two working days. It has also been proposed that the European Standard for electronic invoices should be optional for Member States.

It appears that in, a number of areas, businesses outside the EU who operate within the EU would benefit, particularly from the proposals to extend the ‘reverse charge’ and ‘One Stop Shop’ rules. In addition, the proposed reform of the current arrangements when businesses move stock to a member state prior to sale looks likely to be helpful.

Collectively, these changes should minimise the number of VAT registrations an exporting business requires in the EU and, therefore, reduce their administration costs.

The ViDA proposals will now be discussed by the EU Member States and ultimately, they will require unanimous approval by all Member States to come into law. The European Parliament is already recommending that entry into force of all the provisions should be delayed by 24 months and we expect more developments regarding ViDA during 2023 – bookmark this page to keep up to date.

If you have any queries on cross-broader VAT issues, please contact Richard Hogg or Tom Kivlevan