The way in which business is conducted within the EU will change fundamentally following the approval of the new value added tax (VAT) rules by the European Council, legal experts have said.
The new rules are set out in the VAT in the Digital Age package (ViDA), which aims to modernise the EU’s VAT system and support digitalisation of EU member states. The package brings changes in three main different aspects of VAT practices. It will make VAT reporting obligations for cross-border transactions fully digital by 2030. The information that needs to be submitted by businesses on their transactions will be standardised and the use of e-invoicing for cross-border transactions will be mandatory through a new real-time digital reporting system. These new rules are aimed, among other things, at combating tax fraud.
Under the new VAT regime, online platforms will be responsible for collecting VAT from customers when they facilitate the supply of short-term accommodation rental and passenger transport services, in cases where individual service providers do not charge VAT.
The package will also make it possible for businesses to register only once for VAT purposes for all EU member states, by expanding online VAT ‘one-stop-shops’.
The ViDA package was first proposed by the European Commission in December 2022. Robert Dever, a tax expert at Pinsent Masons, said that the agreement brings to an end a period of almost two years of the EU Council seeking to get this important VAT package across the line.
“The new VAT rules will represent a fundamental change in the way in which business is conducted within the EU and reflect the digitalisation of its member states’ economies, which remains a key focus of global tax reform,” he said.
But he added that it remains to be seen if the new rules, once implemented, will achieve the stated aim of improving the competitiveness of the EU whilst also supporting businesses and tackling VAT fraud.
The new EU VAT system could have implications for the UK government’s policy in similar areas and UK businesses trading with the EU, according to Bryn Reynolds, also a tax expert at Pinsent Masons.
“As EU member states commit to removing friction in VAT compliance on cross-border trade, the fact that the UK cannot participate in these arrangements may have an impact on UK businesses trading with EU member states. But the expansion of the one-stop shop system and progressive step towards a single VAT registration across the EU will be welcomed by UK businesses looking to trade across EU member states,” he said. “Care needs to be taken to adhere to all the legal requirements as where a trader becomes ineligible for a one-stop shop simplification, registration in each member state can be necessary which creates a significant additional compliance burden.”
Reynolds also noted that the decision by the EU to apply the ‘deemed supplier’ rule for VAT collection in relation to passenger transport and short-term accommodation services via platforms may influence UK policy in this area. The Department for Transport and HM Treasury confirmed at the 2024 autumn Budget that they are still considering the responses to the consultation on the VAT treatment of private hire vehicles for conventional services and demand responsive transport services, such as through ride-hailing apps, and will respond in due course.
The ViDA package consists of three acts that seek to update existing EU VAT legislation: a proposal for a Council directive as regards VAT rules for the digital age; a proposal for a Council regulation as regards the VAT administrative cooperation arrangements required for the implementation of the new system; and a proposal for a Council implementing regulation as regards information requirements for certain VAT schemes.
The three proposals are subject to different procedures, but unanimity within the EU Council is required for each one. The European Parliament was consulted and delivered its opinion on 22 November 2023. However, due to substantial changes made by the Council in the directive, the European Parliament will be consulted again on the agreed text.
The text will then need to be formally adopted by the Council before being published in the EU’s Official Journal and entering into force.
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