VAT Harmonisation Will Bail-out Governments

The European Union is harmonising VAT across the 27 member states. A 20 percent norm will be introduced probably by June with registration also likely to be harmonised at the Belgian standard of €5000 earnings per annum.

New cross-border rules introduced on January 1will prove a cash cow for troubled national exchequers to be followed by harmonised rates and registration. The moves, last stages of which are going through the European Parliament and Council of Ministers will provide massive liquidity injections to countries with lower rates such as Britain and Germany.

A three week inquiry by a Belgian VAT expert for EU Reporter concludes:

“The new rules are about collection not simplification”. The new EU scheme makes it clear that any form of service is liable for VAT. As our expert explained: “A charity that believes it is not required to register for VAT would be caught if they, for example, lobby parliament for something.”

In Belgium some 300,000 associations are being caught by the rules enforced by crosschecking introduced in every member state. They face VAT bills going back seven years for which they can only claim back for three years.

Our expert explained that any individual or company invoicing across frontiers under the reverse charge scheme could be caught in their own member state if those responsible for paying the VAT in their country have not done so.

“Non payment in such a case would make the firm that invoiced liable in their own country for unpaid VAT.”

The European Parliament has recently been debating the introduction of new legislation opening the VAT records of each member state to each of the others. “My inquiries show that the member states are pushing hard to collect because of the economic downturn.”

He believes that the implications will mean that the UK will have to reduce its registration rate from £56,000 a year earnings probably to a new harmonised position. “This new e-border legislation is European and while some national differences may continue having people invoicing across borders requires standard rules.”

In mainland Europe it is now virtually impossible to do business or open a bank account without being registered for VAT. “In Belgium only government, local authorities -unless they have a profit making activity which would be liable - doctors and lawyers are exempt VAT.

The EU harmonisation drive was almost certainly in the mind of former Ken Clarke when he warned in a London Sunday Times article three weeks ago that the Conservatives should not commit to massive spending cuts until they have access to the forecasts of the Revenue service.

It is possible to speculate that Gordon Brown has a fair idea that billions of pounds will be available once new measures are announced as the Revenue has said in its leaflet issued in December “later in the year”.

The harmonisation of VAT first appeared on the European agenda with the First Council Directive 67/227/EEC (11 April 1967) on the harmonisation of legislation of Member States concerning turnover taxes.

VAT, as this "turnover tax" was to become known, has been applied in Member States since 1970. EU legislative activities are aimed at coordinating and harmonising VAT legislation for the purpose of a proper functioning of the internal market. Directive 2006/112/CE sought a harmonisation of regulations on VAT.

The EC Treaty, under Article 93, specifically provides for the Council, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee, to adopt provisions for the harmonisation of Member States' rules in the area of indirect taxation (principally Value Added Tax and Excise Duties because indirect taxes may create an immediate obstacle to the free movement of goods and the free supply of services within an Internal Market.

In June 1991, the European Parliament supported a 15% minimum standard rate; later, Parliament voted against the proposed 25% upper limit on the VAT standard rate in 1997, but in 1998 Parliament approved a 15-25% standard rate band under certain conditions.

In May 1998 Parliament also urged action to ensure a uniform application of rules on reduced VAT rates. It also pressed for Member States to be given the option of applying a reduced rate to certain labour-intensive or environmentally-friendly activities – pressure which was eventually successful.

In November 2003, efforts at reaching agreement on harmonised tax rates stalled, and a decision was deferred for six months, although it appears that these talks were never resumed, and efforts were concentrated on harmonising other aspects of VAT legislation first. In December 2005, Parliament voted for a maximum rate of 25% and confirmed its support for reduced rates for certain labour-intensive services. In December 2007, Parliament supported the extension of the temporary derogations for some new Member States, however urging the Council to find a long-term solution on the structure of rates by the end of 2010.

With the arrival of the New Year, we do seem to be seeing adjustments of VAT rates that suggest a universal re-alignment.

Lithuania has increased its VAT rate from 5% to 19%. In December 2009, Ireland announced a slight drop in VAT to 21%, effective Jan 2010. Ken Clarke has warned that UK VAT rates "may" rise to 20% in 2010.

The PROPOSAL FOR A COUNCIL DIRECTIVE amending directive 2006/112/EC was debated in the EP legal affairs committee on Dec 2nd 2009. It clearly states that a new change will require both suppliers and customers VAT numbers to appear on invoices. It also contains provision for routine cross-border inspection of VAT records between EU member states.