ECOFIN ministers adopt reduced VAT rate freedoms into EU law – member states may now implement
On 5 April 2022, EU Finance Ministers (ECOFIN) formally adopt changes to the EU VAT Directive to give member states wider rights to use reduced VAT rates, including an option to introduce a new rate below 5% on a limited range of supplies. The changes are published in the Official Journal, meaning they enter into force 6th April 2022. Member states must implement them at the latest by 1 January 2025.
ECOFIN approval on 5 April comes after the EU Parliament officially reviewed the changes for a second time in March 2022.
4 main elements to new reduced VAT rates compromise
- The measure contains freedoms for member states to apply a new reduced rate below 5% to up to 7 of a list of 24 categories of products and services. They could then also apply reduced rates of 5% or above to the remaining 24 categories of the same list. This covers basic needs, namely those related to the supply of foodstuffs, water, medicines, pharmaceutical products, health and hygiene products, transport of persons and some cultural items (books, newspapers and periodicals), or among other supplies of goods and services listed in Annex III. This list will be added to with supplies including: internet access and live streaming of cultural and sports events; eco-friendly goods; health protective equipment like face masks; and personal hygiene (tampons) goods. Any member state with a current special dispensation for a reduced rate below the existing 5% level would have to include those in their new limit of 7 categories.
- Member states would still have to retain a minimum effective 12% VAT rate across a weighted range of taxable supplies for the balance of other taxable supplies. This is designed to prevent tax competition and distortion to the EU Single Market.
- Crisis mechanism for rapid cuts in VAT rates in the case of future exceptional circumstances, like pandemics, humanitarian crises or natural disasters.
- A sunset clause for 2030 for reduced rates on carbon-intensive supplies, which will likely now be matched to the European Green Deal. This would include chemical fertilisers and chemical pesticides for 2032 having a varied timetable to support small farmers.
EU Parliament highlights costs of reduced rates in 2021
A recent EU Parliamentary Research Service study highlighted that the use of reduced VAT rates by member states raises the compliance costs for businesses. In states with no or only limited reduced rates, compliance costs are estimated at this €600 per businesses. However, countries such as Italy, Spain, Poland and Czechia, with large numbers of reduced rates and goods or services allocated to them, costs rise to over €6,000. EU VAT rates could potentially be cut to 15% if all reduced rates were withdrawn (see below).