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EU reduced VAT rate freedoms adopted – 6 April 2022 in force

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

  1. 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.
  2. 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.
  3. Crisis mechanism for rapid cuts in VAT rates in the case of future exceptional circumstances, like pandemics, humanitarian crises or natural disasters.
  4. 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).

Previous VAT rate rules under EU VAT Directive

Previously, member states were free to set their standard VAT rate provided it is at 15% or above. This floor limit is to prevent distortions in the EU single market by businesses or consumers looking to gain a tax advantage by shifting consumption to other EU states.

The EU VAT Directive also permits member states to have two reduced rates, the lower of which should be 5% or above. However, the range of products and services which countries may grant reduced rates on is tightly controlled and listed in Annex III of the EU VAT Directive. Member states may not deviate from this list.

Additionally, there are a number of special rates permitted by the EU VAT Directive:

  • Super-reduced rates – below 5% on a narrow range of supply such as for maintenance and adaptation of means of transport for people with disabilities;
  • Zero rate – where no VAT is charged but the taxpayer retains the right to deduct input VAT suffered; and
  • Parking Rates – up until 1991, member states were permitted to continue with additional, third reduced rates that were in operation prior to them joining the EU.

EU VAT reforms

Reform (click for details) Update
2025 VAT registration thresholds equivalence foreign businesses On track
Virtual events VAT rule changes Agreed
2024 Payment providers' seller transaction reporting and bookkeeping obligations On track
Digital Reporting Requirements including EU e-invoicing harmonisation Implementation of VAT in the Digital Age?
2023 DAC 7 - marketplace reporting harmonisation On track
Financial Services VAT exemption reform proposals Consultation complete; proposal 2023
Tour operator margin scheme VAT reforms EC undertaking fresh review
2022 EU definitive VAT system On hold
EU reduced VAT rate freedoms Enter into force 6 April 2022
IOSS reforms to prevent double taxation Proposals early 2022
VAT in the Digital Age proposals On track for 16 Nov 2022 publication
Single VAT Registration in the EU - extension of OSS On track for 16 Nov 2022 publication
Proposal for VAT treatment of the platform economy On track for 16 Nov 2022 publication
VAT Gap Initiative Q3 2022
2021 One-Stop-Shop (OSS) single EU VAT return In effect since 1 July 2021
Ending €22 import VAT exemption; new IOSS return In effect since 1 July 2021
Marketplace deemed supplier EU VAT reforms In effect since 1 July 2021
2020 EU four Quick Fixes for VAT In effect
Tax authorities anti-VAT fraud cooperation In effect
Tax Action Plan - 25 VAT and other tax reforms roadmap See 'VAT in the Digital Age' and others
2019 Simplification of e-services VAT compliance and thresholds In effect
Single and multi-use vouchers In effect
2018 Lower e-book and publications VAT rates In effect, although not all EU states have adopted the option
EU Generalised Domestic Reverse Charge VAT Mechanism In effect, although no country has adopted this voluntary option
2015 B2C electronic services VAT reforms - MOSS return In effect

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