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EU reviews ending Financial Services VAT exemption

The EU’s European Commission has launched its latest public consultation on ending banking, insurance and other financial services’ exemption from VAT. In particular taxing fee-based services as opposed to interest-based (loan interest, credit etc). It last attempted to bring financial services into the VAT net in 2007, but disagreements between the UK, Germany and others on shared services ended the talks. European governments have since promoted turnover taxes such as Insurance Premium Taxes, and attempted without success to launch an EU-wide Financial Transaction Tax.

The Commission envisages putting forward a proposal for a Directive by the end of 2021 as part of the EU’s Tax Package VAT action plan. Follow all the European Union’s completed and planned reforms via VAT Calc’s EU VAT reform tracker.

EU financial services VAT roadmap

The EU is looking at two options in the area:

  1. Scrap the VAT exemption on all services, achieving clarity and simplicity. But this may create unintended negative impacts on credit and its wider role in helping economies thrive.
  2. Limit VAT to fee-based services and continue the interest-based service exemption. This is the more likely route as it would probably better address the risks of the impact of the review on consumer prices.

The EU’s current roadmap notes that several alternatives could be considered. For example, taxing financial and insurance services (all or some types) at the standard rate or allowing reduced rates while fixing a minimum rate.

In addition, the impact assessment will consider other measures, such as introduction of cost-sharing arrangements as a way to limit the problem of non-deductible input VAT (the ECJ has held that the current cost sharing rules are not applicable to the financial and insurance sectors).

Following the UK’s exit from the EU and the COVID funding crisis, the EU is keen to see if it can enable member states to levy VAT on some or all financial services. This would include allowing any VAT registered businesses to reclaim input VAT on which they currently suffer large irrecoverable VAT. Financial institutions have attempted to use VAT groups and cost-sharing arrangements, but these have been largely undone by a number of recent European Court of Justice rulings (DNB Banka; Avia)

Whilst VAT on financial services was first concluded as too complex and difficult to apply back in 1977, the successes of China, Australia and India have emboldened the EU. As new technologies ‘ fintech’ change the nature of businesses models and outsourcing, the EU is anxious to update the VAT rules.

EU VAT reforms

Reform (click for details) Update
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2035 Harmonisation of EU e-invoicing and domestic regimes Jan 2035
2030 Digital Reporting Requirements and e-invoicing harmonisation July 2030
Structured e-invoices supercede paper invoices July 2030
EC Sales lists replaced by Digital Reporting Requirements July 2030
2028 EU Customs reforms Published May 2023
€150 import consignment threshold removed Published May 2023
2027 Single VAT Registration in the EU - extension of OSS July 2027
Call-off stock VAT simplification ends July 2027
Harmonisation of B2B Reverse Charge rules July 2027
Proposal for VAT treatment of the platform economy July 2027
2026 DAC8 harmonised crypto asset reporting Approved May 2023
2025 VAT registration thresholds equivalence foreign businesses 1 Jan 2025
Virtual events VAT rule changes 1 Jan 2025
Financial Services VAT exemption reform proposals Consultation complete; proposal awaited
Tour operator margin scheme VAT reforms EC undertaking fresh review
2024 Payment providers' seller transaction reporting and bookkeeping obligations In effect since 1 Jan 2024
2023 DAC 7 - marketplace reporting harmonisation In effect since 1 Jan 2024
2022 IOSS reforms to prevent double taxation On hold
EU reduced VAT rate freedoms Entered into force 6 April 2022
VAT in the Digital Age proposals Published Dec 2022
EU DAC8 cryptocurrency tax reporting proposals Published Dec 2022
VAT Gap Initiative Q3 2022
EU Definitive VAT System On hold
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


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