Can Europe come together in perfect VAT harmony?

Wednesday, May 25, 2011 | Posted by: Graham Brearley
Categories: Thought leadership | Tags: international, VAT, Graham Brearley, cross-border, Europe, EU, goods, suppliers, export, import, origin, green paper, rates, system, destination

The decades-old VAT system for traders operating within Europe is complex, open to fraud and in desperate need of an overhaul in the modern global economy. A new European Commission green paper is consulting with business but can the EU navigate through the political nightmare to adopt a system of VAT rates that is simple and fair? 

A brief history of VAT
Oh, how things change. Remember the early days of VAT? I do: 1974 was the year I started work at the VAT Office. A time when Peter Oosterhuis was the best golfer in Europe; the Osmonds were at number one in the ‘Hit Parade’, ‘dirty’ Leeds, as they became known under Don Revie, were the champions of English football and, incidentally – I couldn’t resist mentioning it – Manchester United were relegated from the old first division.

Who would have thought that such fortunes would change so dramatically over the intervening years.

Oosterhuis can, of course, still be heard commentating on golf on the TV and the Osmonds have, mercifully some would say, paled into pop music obscurity. ‘Dirty’ Leeds momentarily flirted with the Premier league and an appearance in a European Cup semi-final, before going on to languish in the slums of the football league. But VAT still continues on.

While the tax has undergone a few changes over the years – such as the introduction of the Single Market in 1993 and, more recently, the VAT Package changes in 2010 – it continues to operate substantially on the same basis as when it was introduced in the UK in those heady days of the 1970s.

Is all that about to change, however?

New European green paper
If and when implemented, the European Commission’s green paper on the future of VAT will set the course for how VAT will operate through the EU for the next few decades. The Commission recognises that the system was introduced when there were only a handful of member states and when the world was a much different place to do business and now needs a major overhaul.

VAT is complex and a fraud risk
The existing system has become far too complex and susceptible to eye-wateringly high levels of fraud. Any new VAT system needs to address these two key areas.

As I see it, the main challenge is whether the replacement VAT system will be based on taxation in the country of origin (the origin system) or in the country of consumption (the destination system).

Origin system of VAT
While there are compelling arguments for the adoption of the destination system, for me the origin system provides the vast majority of solutions. It is both simple and less prone to fraud.

I acknowledge that for it to work properly, harmonisation of VAT rates across the EU, and the harmonisation of exemptions and reliefs – previously regarded as politically impossible – will be necessary.

Destination system of VAT
The problem with the destination system is that, in effect, businesses within the EU have to operate two separate VAT systems. One for the so-called business-to-business (B2B) model, where VAT is accounted for by the business receiving the supply at the rate applicable in his member state, and another for the business-to-consumer (B2C) model where VAT continues to be charged to the customer by the supplier at the rate applicable in the supplier’s member state.

Given that it is businesses throughout Europe that are tasked with both the collection and payment of the tax, it is encouraging that the Commission has seen fit to consult the business community on the future of VAT in Europe. It is hoped that the time, effort and resource they have put in to the consultation exercise will be rewarded by the Commission actively listening to the respondents and, finally, implementing a system that is much simpler for all involved.

Fair system or fudge?
Like it or not, VAT is a tax that, in one guise or another, is here to stay. Member states are increasingly shifting towards raising revenues from indirect tax sources and there is no reason to believe that this trend will not continue going forward.

A simpler, more robust and efficient VAT system is needed. Let’s hope that what ultimately transpires from this exercise meets those criteria. Unfortunately, the cynic in me leads me to conclude that, as with all things EU, what will emerge will be a typical EU fudge based on politically expedient compromise.

Image: © Centralasian

Graham Brearley is Senior Tax Manager at Grant Thornton. For further advice on VAT, contact the VAT specialist in your local Grant Thornton office, or email .(JavaScript must be enabled to view this email address). Read more about VAT services on our Indirect Tax page.

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