Explanatory Memorandum to COM(2018)21 - Amendment of the VAT Directive as regards the special scheme for small enterprises - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2018)21 - Amendment of the VAT Directive as regards the special scheme for small enterprises. |
|---|---|
| source | COM(2018)21  |
| date | 18-01-2018 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Value added tax (VAT) is a consumption tax, borne ultimately by the final consumer, but which is collected by businesses that supply goods or services. The VAT Directive 1 lays down a series of administrative obligations to ensure that the system functions properly (e.g. VAT registration, invoicing, accounting and reporting). The compliance burden derived from the need to observe these obligations generates a cost for businesses referred to as the ‘compliance cost’. VAT obligations are particularly burdensome for small businesses given that they have more limited resources than large businesses. This leads to small businesses 2 (hereinafter ‘SMEs’) bearing proportionally higher VAT compliance costs than larger businesses.
The VAT Directive therefore sets out several provisions designed to ease the burden on SMEs dealing with VAT. Such provisions are largely contained in Title XII, Chapter 1 of the Directive, ‘Special scheme for small enterprises’ (hereinafter the ‘SME scheme’). These allow Member States to (i) provide for simplified procedures for charging and collecting VAT; and (ii) exempt SMEs with an annual turnover below a certain threshold from charging and deducting VAT (hereinafter the ‘SME exemption’). Simplified VAT obligations are also available in the VAT Directive but outside of the SME scheme. Such measures are optional – Member States can apply them and businesses can avail themselves of them.
The current initiative is part of the reform package announced in the VAT action plan 3 . This was enhanced by the follow-up to this plan 4 , as explained further in the section on consistency with existing policy provisions in the VAT area, and by President Juncker’s letter of intent accompanying the State of the Union Address 2017 5 . However, the review is long overdue for three main reasons.
First, despite the fact that Member States may exempt SMEs from VAT – an option that is widely used – SMEs continue to suffer from disproportionate VAT compliance costs due to how the SME exemption is designed. In particular, SMEs involved in cross-border trade cannot benefit from the SME exemption in Member States other than the one in which they are established. In addition, high VAT compliance costs also stem from the complexity and diversity of rules on VAT obligations across the EU, which SMEs may have to observe when trading cross-border.
Second, the current system has distortive effects on competition on both domestic and EU markets. The SME exemption in one Member State, which is available only to businesses established there, has a negative impact on the competitive situation of those established in other Member States that supply the same market. This issue is set to worsen with the shift towards destination-based taxation under the proposed definitive VAT system; many SMEs may have to charge their customers VAT that differs from that of the Member State in which they are established. The principle of destination-based taxation states that VAT has to be declared and accounted for in the Member State where the customer is established (Member State of ‘destination’) rather than in the Member State where the SME is established (Member State of ‘origin’). This means that (i) there is no level playing field for SMEs to trade within the EU; and (ii) SMEs are discouraged from carrying out cross-border operations and making the most of the opportunities afforded by the single market due to VAT-related obligations in other Member States.
At domestic level, distortions arise because the simplified VAT obligations are linked in principle to the use of the SME exemption, and SMEs outside the exemption (because they have exceeded the turnover threshold or have opted for the normal VAT arrangements) cannot benefit from them. This may result in the ‘threshold effect’, in which SMEs slow their growth to avoid crossing the SME exemption threshold.
Third, the review provides the opportunity to encourage voluntary compliance and therefore help reduce revenue losses due to non-compliance and VAT fraud. While SMEs already find it difficult to comply with domestic VAT obligations, compliance with VAT obligations in other Member States for those involved in cross-border trade is an even more serious obstacle due to the lack of alignment across the EU. The simplified registration and payment system MOSS (Mini One Stop Shop) has addressed these problems in terms of electronic services supplied to final consumers (B2C). Although the e-commerce proposal expands the MOSS to all B2C supplies, there is still a need for further improvement.
There are two more reasons that call for action.
First, the SME scheme is already obsolete, working as it does on the basis of deviations. In its provisions, the VAT Directive itself provides the possibility to depart from the basic SME exemption threshold of EUR 5 000 by expressly setting thresholds for 19 Member States. However, 10 Member States currently rely on derogations from the applicable threshold, and several new requests for derogation have been already submitted.
Second, the SME scheme, which provides for measures to be applied in the Member State where the small enterprises are established, is becoming unsustainable as the VAT system shifts towards destination-based taxation.
As a result, the review aims to create a modern, simplified SME scheme. In particular, it seeks to (i) reduce VAT compliance costs for SMEs both domestically and at EU level; (ii) reduce distortions of competition both domestically and at EU level; (iii) reduce the negative impact of the threshold effect; and (iv) facilitate compliance by SMEs and monitoring by tax administrations.
Contents
·help create an environment that is conducive to SME growth;
·help create an efficient and robust VAT system with a view to creating a single EU VAT area; and
·contribute to the smooth functioning of a deeper and fairer single market.
• Consistency with existing policy provisions in the policy area
The review is part of the VAT action plan setting out ways to modernise the VAT system in order to make it simpler, more fraud-proof and business-friendly. In particular, this proposal complements two other legislative initiatives resulting from the VAT action plan on the shift towards destination-based taxation: (i) the e-commerce proposal, which was adopted in December 2016 6 ; and (ii) the definitive VAT system proposal, which was adopted in October 2017 7 . It is also consistent with the VAT place of supply rules for telecommunications, broadcasting and electronically supplied services 8 , which entered into force in 2015.
• Consistency with other EU policies
The proposal is consistent with the 2015 single market strategy 9 , where the Commission set out to help SMEs and start-ups grow and to address key difficulties that SMEs face in all phases of their lifecycle – these prevent them from taking full advantage of the single market. It is also in line with EU policies on SMEs, as set out in the 2016 Start-Up Communication 10 and the ‘Think Small First’ principle outlined in the 2008 Small Business Act Communication 11 .
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The Directive resulting from this proposal amends the VAT Directive on the basis of Article 113 of the Treaty on the Functioning of the European Union. This provision enables the Council, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, to adopt provisions for the harmonisation of Member States’ legislation in the area of indirect taxation.
• Subsidiarity (for non-exclusive competence)
The proposal is consistent with the principle of subsidiarity as set out in Article 5(3) of the Treaty on European Union 12 . The main problems that have been identified (high compliance costs, distortive effects etc.) are triggered by the rules of the existing VAT Directive. Simplifying them in order to reduce the compliance burden of SMEs requires the Commission to submit a proposal to amend the VAT Directive. The Member States have very little room for manoeuvre in connection with the Directive. As a result, this proposal will clearly offer value over and above what can be achieved at Member State level.
• Proportionality
The proposal is consistent with the principle of proportionality as it does not go beyond what is necessary to meet the objectives of the Treaties, in particular the smooth functioning of the single market. In accordance with the subsidiarity test, it is not possible for Member States to address the problems facing SMEs that are triggered by existing VAT rules without a proposal to amend the VAT Directive. The proposed improvements are limited to a small number of VAT provisions that lie at the heart of the problems identified. Section 7.4 of the impact assessment accompanying this proposal contains further details.
• Choice of the instrument
A Directive is proposed in order to amend the VAT Directive.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
In preparing the proposal, the rules on SMEs currently provided for in the VAT Directive have been evaluated. The evaluation, which can be found in Annex 8 of the impact assessment accompanying this proposal, is based in particular on a retrospective evaluation of elements of the EU VAT system 13 conducted by an external consultant in 2011 and a study on the SME scheme carried out by another external consultant in 2017.
• Stakeholder consultations
The consultation strategy sought to gather feedback from stakeholders on the application of the current VAT provisions for SMEs and to get their views on possible changes to such provisions.
The strategy consisted of (i) a consultation targeting 2 000 small enterprises, which was carried out as part of the 2017 study; (ii) an SME panel consultation conducted by the Enterprise Europe Network 14 , with 1 704 contributions received; (iii) an internet-based open public consultation held over 12 weeks from 20 December 2016 to 20 March 2017, with 113 contributions received 15 ; (iv) a workshop held under the auspices of the Fiscalis 2020 Programme and organised in the form of a joint meeting of the Group on the Future of VAT (GFV) and the VAT Expert Group (VEG) to allow business representatives from VEG to participate; and (v) contributions received via the REFIT platform 16 . Spontaneous contributions have also been taken into account.
• Collection and use of expertise
The review that this proposal is based on relies mainly on the analysis carried out as part of the 2017 study on the SME scheme. This study assessed how the current VAT rules for SMEs in the VAT Directive function at domestic and EU level. It also developed options for reviewing the current rules and analysed the impact of such options.
In addition, two more studies have fed into this review: the 2016 study on modernising VAT for cross-border e-commerce and the 2011 study involving a retrospective evaluation of elements of the EU VAT system.
• Impact assessment
The impact assessment for the proposal was considered by the Regulatory Scrutiny Board on 13 September 2017. The Board issued a positive opinion on the proposal together with some recommendations, which have been taken into account. The opinion of the Board, the recommendations and an explanation of how they have been taken into account are included in Annex 1 of the Staff Working Document accompanying this proposal.
• Regulatory fitness and simplification
This initiative is part of the REFIT programme. According to the Commission Work Programme 17 , which outlined the new initiatives to be adopted under that programme in 2017, the SME review was included in the Commission priority 18 ‘A Deeper and Fairer Internal Market with a Strengthened Industrial Base’.
The proposal delivers on the REFIT-related objectives to (i) reduce the VAT burden on SMEs and tax administrations; and (ii) to reduce distortions at EU level so that SMEs can take full advantage of the single market. In particular, compliance costs for SMEs are expected to be reduced by 18 % under this initiative compared to the baseline scenario outlined in the impact assessment (EUR 56.1 billion per year, compared to EUR 68 billion per year at present). Cross-border trading activities by SMEs within the EU are also expected to increase by 13.5 %. It should also have a positive impact on both voluntary compliance and on business competitiveness. For more information, see sections 6 and 7 of the impact assessment accompanying this proposal.
4. BUDGETARY IMPLICATIONS
The proposal will have no negative implications for the EU budget.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
Implementation of the proposal will be monitored as part of the responsibilities of the Commission for ensuring that EU VAT legislation is correctly applied. In addition, the Commission and Member States will monitor and evaluate whether this initiative is functioning properly and the extent to which its objectives have been achieved based on the indicators set out in section 8 of the impact assessment accompanying this proposal.
• Overview of the main provisions in the proposal
(1)opening up the exemption for small enterprises to all EU eligible businesses, whether or not established in the Member State where the VAT will apply and the exemption will be available;
(2)establishing an updated value for the maximum level of national exemption thresholds;
(3)introducing a transitional period during which small enterprises that temporarily exceed the exemption threshold will be able to continue using the exemption;
(4)introducing simplified VAT obligations for both exempt and non-exempt small enterprises.
Detailed explanation of the specific provisions of the proposal
Points 1 to 7, 13, 17, 19 and 20 of Article 1 propose a number of amendments that relate to updates, technical adjustments and references to the SME exemption in other provisions of the VAT Directive.
Point 8 of Article 1 introduces a new Article 280a to provide definitions of various concepts necessary for applying provisions of the special scheme provided for in Title XII, Chapter 1 of the VAT Directive.
The definition of ‘small enterprises’ helps clarify those provisions and increase the legal certainty for taxpayers. It would cover all enterprises whose Union annual turnover in the single market is no higher than EUR 2 000 000. With reference to their VAT treatment, the introduction of this definition allows for simplification measures targeted at enterprises which, in economic terms, are small even though their turnover exceeds the exemption threshold. The wider category of small enterprises therefore includes enterprises exempted from VAT as well as enterprises eligible for exemption but who opted for the application of the normal rules or whose turnover exceeds the exemption threshold and who are therefore taxed on the basis of the normal rules.
There are also two definitions of turnover that have been introduced in order to facilitate the application of the national exemption thresholds (‘Member State annual turnover’) and the eligibility condition applicable to non-established small enterprises (‘Union annual turnover’).
Points 9, 10 and 16 of Article 1 provide for changes resulting from the elimination of graduated tax relief, which has been found to be a source of complexity and contributes little to reducing the compliance burden of small enterprises. This measure should therefore be removed.
Point 11 of Article 1 amends Article 283(1) as regards the exclusion from the exemption of non-established enterprises. This amendment is necessary to open up the exemption to EU businesses not established in the Member State where they carry out supplies subject to VAT.
Point 12 of Article 1 amends Article 284 to define the new scope of the exemption for small enterprises, which will remain optional for Member States. Member States that decide to implement the SME exemption will have the possibility to set their threshold at the level that reflects best their particular economic and legal context. However, in order to ensure that the scope of the exemption is limited to the smallest enterprises and to limit the possible distortive effects of the exemption, the VAT Directive will set the maximum level of the exemption threshold common to all the Member States. The exemption will be available to all EU eligible businesses, whether or not established in the Member State where they carry out supplies subject to VAT.
For any small enterprise able to avail itself of the exemption in a Member State where it is not established, two conditions must be met: (i) the enterprise’s annual turnover in that Member State (‘Member State annual turnover’) should be below the exemption threshold applicable there; and (ii) its overall turnover in the single market (Union annual turnover) should not be higher than EUR 100 000. The latter eligibility condition should prevent abuse by large enterprises that, in the absence of the overall EU turnover threshold, would be able to benefit from the SME exemptions in several Member States (e.g. if their turnover in each Member State were below the applicable SME exemption threshold) despite having a large overall turnover.
In order to ensure the effective control of application of the conditions of the exemption, the Member State in which a business availing itself of the exemption in other Member States is established must collect all relevant information on its turnover. Therefore, where a small enterprise avails itself of the exemption in Member States other than that in which it is established, the Member State of establishment will have to ensure the accurate declaration of the Union annual turnover and the Member State annual turnover by the small enterprise and will inform the tax authorities of the other Member States concerned in which the small enterprise carries out its supplies.
Point 14 of Article 1 modifies Article 288 to clarify which transactions should be taken into account while calculating the annual turnover, serving as a reference for applying the exemption to small enterprises.
Point 15 of Article 1 inserts a new Article 288a, which introduces a transitional period for small enterprises making use of the SME exemption whose turnover exceeds the exemption threshold in a given year. Such enterprises are allowed to continue using the SME exemption for that one year, provided that their turnover does not exceed the applicable SME threshold by more than 50 % in that year. The provision reflects two endpoints to this transitional period, which act as a safeguard against the abuse of this measure: time-related (1 year) and turnover-related (exceeding the applicable exemption threshold by more than 50 %).
Point 18 of Article 1 introduces a new Section 2a on simplification measures for both exempt and non-exempt enterprises. The new subsection 1 integrates a number of simplified obligations for exempt enterprises into the exemption scheme (registration, invoicing, keeping of accounts and VAT returns). In addition, Member States retain the possibility to release exempt small enterprises from other obligations referred to in Articles 213 to 271.
The new subsection 2 provides for a set of simplified obligations for small enterprises that do not benefit from the SME exemption. Such enterprises could be both those eligible for exemption but opting for taxation on the basis of the general rules and those with turnover above the exemption threshold but lower than EUR 2 000 000, who therefore qualify as small enterprises in the sense of the newly introduced definition. As exempt enterprises cannot deduct the input VAT, the exemption would not really address the concerns of all eligible enterprises. In particular, small enterprises supplying goods and services to other taxable persons may prefer to be taxed on the basis of the general rules. Reducing the VAT compliance costs for such enterprises is therefore linked to simplifying their VAT obligations rather than to the exemption itself.
Member States should therefore also define a set of simplified VAT obligations for non-exempt small enterprises. Such a set should include simplified registration, simplified record keeping and longer tax periods, which would result in less frequent filing of VAT returns. Non-exempt small enterprises should also be able to opt for the application of normal tax periods.