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EU reduced VAT rates raises compliance costs

EU Parliament highlight disproportionate cost for small businesses; EU VAT rate could be cut to 15% if reduced rates withdrawn

An EU Parliamentary Research Service study has 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EU VAT rates could potentially be cut to 15% if all reduced rates were withdrawn (see below).

Extending member states’ EU reduced rate setting freedoms is close to agreement. This would enable states to introduce further rates with only broad restrictions.

Countries undoubtably face heavy political and social responsibilities to use reduced VAT rates to reflect their priorities. But the report points out the hidden costs to this, and suggests other means of support, such as welfare spending, could be used to provide relief to the less well off or boost key sectors e.g. environmental causes.

Link between the number of reduced VAT rates and compliance costs for businesses

The study highlights some of the factors around the extensive use of reduced VAT rate to contribute to these high compliance costs:
  • Small and medium sized businesses are disproportionately affected since the costs of compliance are largely fixed. In states with a large proportion of small businesses, including with more entrepreneurial business environments, this raises the total average costs
  • Businesses not correctly charging reduced VAT rates because of the complexity of tracking them will be losing out on business revenues incorrectly paid over to the tax authorities
  • Businesses must spend time and/or money tracking rates and products to ensure proper compliance and to avoid audits and potential penalties.
  • They hinder the efficient flow of cross-border transactions when member states have differing rules and rate, and thus undermine the Single Market

The report goes on to recommend the use of automation in VAT compliance, this can include e-invoicing and tax engines.

15% EU VAT rate if reduced VAT rates scrapped

The current average VAT rate is 22% across the EU member states. This could be reduced to just 15% is all reduced rates were withdrawn.

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