Updating EU rules on VAT rates: The benefits, drawbacks, and compliance solutions

The EU’s plans to update rules on rates of VAT will deliver some much-needed flexibility among member states, yet there are question marks over potential complexities. In this article, Alex Baulf, Senior Director of Global Indirect Tax at Avalara, discusses the potential impacts on economies and businesses, and why digital solutions could be the answer to overcoming any challenges. 


he recent proposal by the European Commission to update EU rules on rates of Value Added Tax (VAT) is a recognition that legislation needs to move more quickly to meet the needs of the present day.

The events of the past two years have played no small part in this, with COVID-19 accelerating the adoption of digital technologies by several years.

Indeed, according to a McKinsey global survey of executives, organisations accelerated the digitisation of their customer and supply-chain interactions and internal operations by three to four years in 2020 alone. Further, the report also indicates that the share of digital or digitally enabled products in company portfolios accelerated by as much as seven years in a mere matter of months.

With this in mind, the EU has recognised that legislation needs to move fast to keep pace with the needs of an ever modernising and increasingly digital economy.

But what does this latest announcement on VAT actually mean in practice?

Alex Baulf 
Senior Director of Global Indirect Tax at Avalara

Providing relevant and flexible improvement

Essentially, the proposed agreement will attempt to put EU businesses on an equal footing.

Previously, existing derogations allowed only some member states to apply preferential rates to certain products, while other EU member states were missing out.

The new proposal attempts to rectify this – instead, all member states will be able to access an updated list of goods and services for which zero and reduced VAT rates are allowed, taking into account the benefit of the end-user.

Critically, the updated VAT rules will provide governments with greater flexibility.

Through the agreement, they will be empowered to reduce VAT rates on several new goods and services to drive greater benefits to consumers.

More broadly, the changes will also allow leaders to respond more effectively to the pressing issues of our time, whether that’s being able to make proactive changes in response to the pandemic or helping to tackle the climate crisis.

Just some of the key commitments include the planned phasing out of reduced VAT rates or exemptions on fossil fuels and other goods with a similar impact on greenhouse gas emissions by 1 January 2030.

Understanding the possible complexities

Undoubtedly, the new VAT proposal will help to address critical issues facing the region, and therefore stands as more suitable legislation. However, there are some challenges that businesses will face in the lead up to the proposal’s implementation.

While some businesses will benefit from lower VAT rates applying to their goods and services and may be in a position to offer lower prices or increase their profit margins as a result, the updated EU rules on value-added tax rates (VAT) may create new complexities for businesses seeking to keep pace with changing regulations.

The possible increase in the number of rates across Europe may lead to additional complications, such as making it more difficult to ascertain the correct VAT liability of a product and to decide how this is managed and maintained in systems – both on the sales and purchasing sides.

There may also be an impact in relation to compliance costs on businesses.

Managing the process of establishing VAT rates on their own can be time-consuming, meaning tax and finance departments must face change on all fronts, and that change is easier said than done. Indeed, companies will need to educate themselves and aim to truly understand any new implications inside out to avoid any compliance slip ups. In addition, there will be commercial decisions around pricing and the interaction between reduced rates and natural price points and psychological pricing in the mind of consumers.

Getting tax compliance right

Thankfully, there are solutions available that can be tapped into to help overcome the administrative challenges associated with the EU’s proposed VAT changes.

Leveraging technology can help take the burden of getting compliance-ready away from already stretched businesses and help avoid additional liabilities and penalties. And much of this can now rely on automation to manage the entire VAT compliance life cycle, be it accurate VAT rate determination, producing the VAT return, calculating the right payments due to tax authorities or the possible identification of fraudulent transactions.

With the pandemic having made hybrid and remote working models the new normal, many firms have already begun their digital transformation journey and are therefore familiar with many crucial technologies such as the cloud.

This is ultimately where finance departments should be looking – to ensure streamlined operations and compliance, adopting cloud-based compliance solutions is a logical, cost-effective approach.

Be it VAT or other various transaction taxes, from sales and use to GST, excise, communications, lodging, and other indirect tax types, today’s digital solutions are helping businesses of all shapes and sizes get tax compliance right.