The European Commission unveiled proposals designed to give more flexibility to member states in setting VAT rates and to reduce VAT complexities for SMEs. The proposals are the final steps of what the Commission describes as an overhaul of VAT rules.

While a minimum standard VAT rate of at least 15 percent will continue to apply, the proposed new rules would enable all member states to apply a range of rates to products as follows:

• two separate reduced rates of between 5 percent and the standard rate chosen by the Member State;
• one exemption from VAT (or ‘zero rate’);
• one reduced rate set at between 0 percent and the reduced rates.

The Commission also proposes to abolish the list of goods and services to which reduced rates can currently be applied. Instead, there will be a list of products to which reduced rates cannot be applied, ensuring that products such as alcohol, weapons, tobacco and gambling will always be taxed at the standard rate or above.

VAT rules for small businesses are also set to change. The Commission proposes the following:

• A €2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures, whether or not they have already been exempted from VAT;
• The flexibility for member states to free small businesses qualifying for a VAT exemption from obligations relating to identification, invoicing, accounting or returns;
• A turnover threshold of €100,000 allowing companies operating in more than one member state to benefit from the VAT exemption.

These legislative proposals will now be submitted to the European Parliament and the European Economic and Social Committee for consultation and to the Council for adoption. The amendments will become effective only when the switch to the definitive regime effectively takes place.