Destination principle

The VAT system within the EU was always intended to be an origin-based system, where VAT is charged in the member state where the supplier is established – this was to achieve the aim of a VAT system operating within the EU in the same way as it would have within a single country.

However, as a result of changes that have been made over the years, certain key aspects of the VAT system have moved to a destination-based system, where VAT is payable in the member state of the customer. The most recent example of this was the VAT Package where, since 1 January 2010, most cross-border supplies of services are taxed by the customer applying the reverse charge in their own member state.

The Commission has now accepted that it will not be possible to fully implement the origin principle in the foreseeable future, so has abandoned the principle. This will mean that future changes will work on the basis of implementing a destination principle system, which will allow efforts to be focused on making it work, rather than it being seen as a temporary solution until the origin principle could be fully implemented.

This should be beneficial for all parties as it will allow the focus to be directed at making a destination based principle work for both member states and businesses.

Extended reverse charge

One of the issues facing businesses operating in the EU is that they have to apply diverse VAT rules depending on the member state where the VAT is due. Member states also have a certain amount of flexibility in how they implement the VAT Directive, with the result that there can be wide differences in what is implemented in each country and even how the same principle is applied.

The extended reverse charge, which shifts the liability to account for VAT from a non-resident to a resident business, is a good example. It has not been implemented by all member states and, where it has been, there can be significant differences in how it works in practice.

This difference in treatment can lead to real difficulties for businesses that have to not only register for VAT and submit VAT in other member states but also be sure as to how the VAT due on their transactions is collected. In order to combat these difficulties, the Commission proposes that there will be an EU VAT web portal, which member states will update with information on issues such as VAT registration, invoicing, VAT returns and right of deduction.

If all member states contribute to this facility, it should provide a much needed resource until there is more uniformity in how member states apply VAT. However, it must be recognised that there will be issues in how tax authorities apply the VAT rules in practice and so there will still be a need for local knowledge. There are also concerns about the reliability of the information provided on the website and how often it will be updated.

Reducing compliance

Under the current system, tax administration is primarily the responsibility of the member states, despite the fact that it has a big impact on the functioning of the single market. As a result, the information required on VAT returns varies considerably from one state to another as well as the frequency of returns – many states also have a requirement for annual returns which consolidate the periodic returns that have been submitted throughout the year.

The introduction of a common VAT return would mean that businesses could set up their accounting systems to allow common reporting of VAT in all jurisdictions where they were registered for VAT. While this is possible under the current mechanism, it is an onerous task initially to set up the system so that it takes account of all of the variations around the EU and then ensure that any changes in forms or common practice are taken into account.

It would be much easier for taxpayers if there was a common VAT return across the EU, requiring identical information and deadlines. In 2013, the Commission plans to propose a standardised VAT declaration available in all EU languages. This will be followed by proposals on issues such as registration and invoicing.

One Stop Shop extension

The concept of the One Stop Shop (OSS) has the potential to considerably reduce the burden of cross-border trading within the EU for many businesses. It is already available for non-EU businesses, providing electronically supplied services to private individuals within the EU and has the effect of simplifying VAT compliance.

It works on the basis that, while local VAT has to be charged to the customers based on their location, there is only one VAT registration in one member state which is used to account for all of this VAT. The OSS is being extended to EU companies in 2015, when businesses providing electronically supplied services to private individuals in the EU will have to account for VAT in the member state where their customer is based.

It is hoped that a successful implementation of the OSS will persuade member states to introduce it more widely, for example for distance sellers.

If it was more widely introduced, businesses would still need to know what rate of VAT to charge but would avoid the need for VAT registration and ongoing VAT returns in other member states. This would represent a significant benefit over the current system where VAT compliance is required in potentially all states.

VAT is a major source of revenue and, in 2009, accounted for €860bn (£682bn) or 21% of national tax revenues across EU member states. As a result, member states will be reluctant to implement any changes which will put any of this VAT at risk.

It must also be recognised that the EU is currently made up of 27 member states and is constantly growing. This makes agreement on the way forward on any issue difficult to achieve and, when combined with the importance of VAT from a financial perspective, means that achieving any significant changes to the EU VAT system must be seen as a long-term objective with many of the desired changes taking many years to achieve in practice.

Andy Spencer, head of consulting at VAT compliance and consulting practice, Accordance