General corporate matters: Commission proposes further simplification of the VAT system

United Kingdom

The European Commission has adopted a proposal for a directive aimed at reforming the VAT refund procedures for taxable persons moving within the European Union. The Directive would authorise taxable persons to deduct, on their periodic returns, any tax they have paid in a Member State in which they are not established. This would replace the refund procedure laid down by the Eighth VAT Directive and would require an amendment to the Sixth VAT Directive.

The amount of VAT eligible for deduction would be determined according to the rules of the Member State of establishment, and no longer according to the rules of the Member State which collected the tax, as is the case at present. This system involves approximating the rules on the deduction of VAT charged on expenditure which is incurred as part of the normal running of a business but also contains some element of private consumption.

The changes would necessitate the creation of a bilateral debt compensation system between the Member States. The Commission has proposed a Regulation to manage relations between Member States as regards such a system. The proposed Regulation would require each Member State to inform each of the other Member States, every six months, of the amount of VAT deducted during the past half-year which the Member State of purchase is required to refund. It would also introduce the necessary additional verification measures, in particular through mutual assistance and exchange of information.