EU 2022 VAT rate setting freedoms

EU member states have provisionally agreed to free-up the rules on setting reduced EU VAT rates on goods and services – currently, they are tightly controlled by the EU VAT Directive. It remains unclear if the planned 2022 implementation date will now go ahead since the measure is linked to the contentious introduction of the Definitive VAT System. It is part of the EU Action Plan for VAT and other reforms.

Freedoms on reduced VAT rate setting

In January 2018, the EU Commission proposed that states would take full control over their VAT rate setting:

• Right to set reduced rates at any level for most goods and services;
• A proviso that their weighted rate for all taxable supplies remained at or above 12%; and
• A ‘negative list’ would restrict reduced rates on certain, sensitive goods, such as firearms and alcohol. 

Currently, see below, there are restrictions around the use of reduced rates to prevent distortions in the Single Market, and to keep the system simple for administration by businesses and the tax authorities.

2022 Introduction?

Member states have agreed that the rate-setting reforms should be introduced alongside the proposed Definitive VAT System in 2022. However, since this complex overhaul of the EU VAT regime is now likely to be postponed further, member states have indicated that they may prioritise the rates reform, and untie it from the switch to the destination-based VAT system.

Some member states have also suggested a ‘positive list’ instead of a ‘negative list’ as well as producing a comprehensive online VAT rate database for taxpayers’ use.

Current VAT rate rules under EU VAT Directive

Currently, member states are free to set their standard VAT rate provided it is at 15% or above. This floor limit is to prevent distortions in the EU single market by businesses or consumers looking to gain a tax advantage by shifting consumption to other EU states.

The EU VAT Directive also permits member states to have two reduced rates, the lower of which should be 5% or above. However, the range of products and services which countries may grant reduced rates on is tightly controlled and listed in Annex III of the EU VAT Directive. Member states may not deviate from this list.

Additionally, there are a number of special rates permitted by the EU VAT Directive:

• Super-reduced rates – below 5% on a narrow range of supply such as for maintenance and adaptation of means of transport for people with disabilities;
• Zero rate – where no VAT is charged but the taxpayer retains the right to deduct input VAT suffered; and
• Parking Rates – up until 1991, member states were permitted to continue with additional, third reduced rates that were in operation prior to them joining the EU.