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EU reduced VAT rate freedoms 2022 update

  • Jan 28, 2021 | Richard Asquith

The EU is re-evaluating plans to give member states further powers to change reduced VAT rates. This would allow countries to increase the number of reduced rates, and withdraw the current restricted list of goods (VAT Directive Annex II) which are allowed these rates. This was part of a wider EU VAT Action Plan set of reforms.

Political agreement on this had been reached for implementation in 2022, but this was tied to the implementation of the Definitive VAT System reforms which now seems unlikely to progress. Portugal, which currently holds the Presidency of the Council of the EU, is now aiming to get final agreement by June 2021 on an implementation date.

The main area of outstanding agreement is whether to use a negative list (which goods or services cannot apply reduced rates) or a longer positive list (which supplies can have the use of reduced rates).

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. 

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He can be contacted at: richard.asquith@avalara.com. He is part of the European leadership team which won International Tax Review's 2020 Tax Technology Firm of the Year. Richard trained as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.