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EU VAT reduced rates overhaul

  • Jan 18, 2018 | Richard Asquith

EU VAT reduced rates overhaul

The European Commission has today issued proposals giving more flexibility to EU member states in setting their reduced VAT rates.  The plans could be implemented in 2022.

Presently, states are limited to two reduced VAT rates below their national standard VAT rate, but no lower than 5%.  Countries may only set their reduced rates for prescribed goods and services listed in Annex III of the EU VAT Directive.  Although many states benefit from reduced rates on certain supplies that were negotiated on their accession into the EU. This has produced many irregularities between states, and prevented reforms on VAT rates for products such as e-books, children's clothing and womens' sanitary products.

New reduced VAT rate bands

The reforms represent a compromise between the freedom to set rates at the national level and avoiding distortions to competition in the Single Market. It also is an important change as it lays the groundwork for the 2022 definitive VAT system and removal of derogations.

Under the new proposals, states could have:

  • two separate reduced rates of between 5, and the standard rate chosen by the country;
  • a zero rated bans for supplies;  and
  • one reduced rate set at between 0% and the reduced rates.

States would be required to maintain their new reduced and standard rate (which must currently be 15% or above) at a blended rate of 12% or above.  This requirements aims to stop countries aggressively cutting rates to attract consumers border-hoping for purchases.

Negative list of supplies excluded from reduced rates

There would be a 'negative list' of a small range of goods and services which would be excluding from the new, reduced rates option. These could include:

  • arms, tobacco and car fuel
  • products subject to particular place-of-supply rules (e.g. supply and hire of vehicles),
  • high-value items that are easily transportable (jewelery, telecommunication equipment, works of art),
  • supply of computer, electronic, and optical products; electrical equipment; machinery and equipment not normally seen as a B2C supply; and furniture,
  • items subject to the special origin-based schemes (e.g. flat-rate farmers, travel agents, and taxable dealers


VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is the former VP Global Indirect Tax at Avalara