Brussels considering major changes to second-hand goods, donations and business car VAT deductions to support the circular economy.
The European Commission has launched a consultation on reforming EU VAT rules to better support recycling, reuse and other circular economy business models.
The initiative, referred to as “Circular VAT” or “green VAT”, could lead to targeted amendments to the EU VAT Directive in Q2 2027. It forms part of the Commission’s wider Circular Economy programme and is intended to complement the forthcoming Circular Economy Act.
Other member states have been reviewing this, including Sweden and Belgium, have been implementing new legislation. And the EU has attempted green VAT review in the past.
The consultation concentrates on three areas.
1. Second-hand and refurbished goods
Brussels says existing VAT rules can make purchasing new business assets more attractive than buying reused or refurbished equivalents.
One problem is input VAT deduction. A business buying a new laptop or machine may generally deduct the VAT, whereas different rules can apply when second-hand goods are acquired and subsequently returned to the market. The Commission also considers the existing second-hand goods rules complex, fragmented and based on outdated definitions.
Potential reforms include:
- harmonising the VAT margin scheme and potentially making its application more general or mandatory;
- updating the definition of second-hand goods;
- harmonising and digitalising record-keeping and reporting; and
- removing VAT distortions affecting reused, refurbished and remanufactured products.
This could be significant for the rapidly expanding resale economy. The Commission cites an EU online second-hand goods market worth around €94 billion, while almost 87% of EU consumers are estimated to have bought or sold second-hand products.
2. Stop VAT favouring destruction over donation
A particularly striking issue concerns unsold goods.
Under current rules, businesses may retain input VAT deductions when goods are destroyed, while donating those goods can trigger different VAT consequences. The Commission believes this can make destruction economically preferable to donation.
Options being considered include withdrawing VAT deduction where viable goods are deliberately destroyed, extending the existing small-gifts rules, and introducing harmonised VAT relief for donations to recognised charities.
The scale is potentially substantial. Between 264,000 and 594,000 tonnes of textiles placed on the EU market are estimated to be destroyed each year without ever being used.
3. Green VAT deductions for company cars
The third pillar could use VAT deductibility to accelerate the transition towards lower-emission corporate fleets.
The Commission is considering allowing full VAT deduction for non-polluting passenger cars purchased or leased for taxable business activities, while restricting or prohibiting VAT deductions for other vehicles. Such rules could either be mandatory EU-wide or leave some discretion to Member States.
VAT becoming an environmental policy tool
The initiative is therefore broader than simply offering reduced VAT rates for environmentally friendly products.
It could reshape some of the fundamental rules governing input VAT deduction, the second-hand margin scheme and donated goods, using VAT to remove incentives which Brussels believes currently work against reuse and recycling.
No measures have yet been agreed. The Commission will run its evaluation and impact assessment through Q1 2027, before any legislative proposal is finalised.
The public consultation is open until 4 November 2026, with businesses, advisers, trade associations and tax authorities invited to respond.
