Explaining the 2021 EU VAT Changes

If you are a business owner in the EU, you may have heard about upcoming changes to the Value Added Tax (VAT) system, set to take effect from July 1st 2021 under the new EU VAT rules. This article will provide you with a comprehensive overview of these changes and how they will impact businesses operating in the EU.

What is VAT and How Does it Work?

VAT is a tax added to the purchase price of certain goods and services sold within the EU. The tax is charged at each stage of production, with each seller claiming a credit for the tax paid on their purchases. Ultimately, the burden of the tax falls on the final consumer.

One of the benefits of VAT is that it allows for a more efficient tax collection system. Since the tax is collected at each stage of production, it is easier for tax authorities to monitor and collect the tax revenue. Additionally, VAT is a significant source of revenue for many EU countries, and the revenue generated from VAT is often used to fund public services and infrastructure projects.

However, VAT can also be a burden for small businesses, as they may not have the resources to manage the administrative requirements of the tax. Additionally, VAT can be a complex tax to understand and comply with, particularly for businesses that operate across multiple EU countries. As a result, many businesses seek the advice of tax professionals to ensure they are complying with VAT regulations and minimizing their tax liability.

History of VAT in the EU

The VAT system was introduced in the EU in 1967, in order to create a more efficient and transparent way of collecting tax revenue. Since then, VAT has become one of the most important and widely used taxes in the EU, accounting for nearly 25% of all tax revenue collected.

Over the years, the VAT system has undergone several changes and reforms in the EU. In 1993, the single market was established, which meant that goods and services could be traded freely between EU member states without any barriers. This led to the introduction of the ‘reverse charge mechanism’, which allowed businesses to account for VAT on goods and services they purchased from other EU countries, rather than paying VAT at the border. In 2010, the EU introduced a standard VAT return form, which made it easier for businesses to report their VAT transactions across different member states.

The Need for 2021 VAT Changes

The VAT system has been in need of reform for some time, as it has become overly complex and burdensome for businesses. The new EU VAT rules aim to simplify and modernize the system, making it easier for businesses to comply with their tax obligations while also reducing the administrative burden.

One of the key changes in the new VAT rules is the introduction of a One Stop Shop (OSS) system. This will allow businesses to register for VAT in one EU member state and then report and pay VAT for all their sales across the EU through a single online portal. This will greatly simplify the process for businesses that sell goods or services across multiple EU countries.

Another important change is the removal of the low-value consignment relief (LVCR) for goods imported into the EU. This relief allowed goods valued at less than €22 to be imported into the EU without VAT being charged. However, this has led to a surge in online sales of low-value goods from non-EU countries, which has had a negative impact on EU businesses. Removing the LVCR will level the playing field for EU businesses and ensure that all goods imported into the EU are subject to VAT.

Overview of the 2021 EU VAT Changes

The main changes under the new EU VAT rules include the introduction of a One-Stop Shop (OSS) system, which allows businesses to register for VAT in one Member State and report all of their supplies of cross-border services within the EU under a single VAT return. This system will also include supplies of goods through distance sales.

Another important change is the abolition of the low-value consignment relief for goods imported into the EU from outside the Union. This means that all goods imported into the EU will be subject to VAT, regardless of their value.

Additionally, the new EU VAT rules will require online marketplaces to take more responsibility for VAT compliance. This means that online marketplaces will be held liable for any unpaid VAT by their sellers, unless they can prove that they have taken reasonable steps to ensure that their sellers are VAT compliant.

Who Will Be Affected by the 2021 EU VAT Changes?

The changes will affect businesses that supply services or goods to customers in the EU, regardless of their location. This means that businesses outside of the EU who supply goods or services to customers within the EU will also need to comply with the new rules.

Additionally, the changes will impact businesses that sell goods through online marketplaces, such as Amazon or eBay. These marketplaces will be responsible for collecting and remitting VAT on behalf of their sellers, which may result in changes to their fee structures.

Furthermore, the new rules will introduce a One Stop Shop (OSS) system, which will allow businesses to register for VAT in one EU member state and report and pay VAT for all their sales across the EU. This is intended to simplify the VAT compliance process for businesses that sell across multiple EU countries.

Key Changes to VAT Rates and Thresholds

The VAT rates and thresholds will remain largely unchanged under the new rules. However, new VAT rates will be introduced for certain goods and services, such as electronic publications, which will now be subject to the same reduced VAT rates as printed publications.

In addition to the changes in VAT rates for electronic publications, there will also be changes to the VAT treatment of imported goods. From 1 January 2021, all goods imported into the UK will be subject to VAT, regardless of their value. This means that businesses that import goods will need to register for VAT and account for the VAT due on their imports.

Another key change to the VAT rules is the introduction of the postponed VAT accounting scheme. This scheme will allow businesses to account for import VAT on their VAT return, rather than paying it upfront at the border. This will help to ease the cash flow burden for businesses that import goods from the EU and other countries.

Understanding One-Stop Shop (OSS) System

The One-Stop Shop (OSS) system allows businesses to register for VAT in one Member State and report all of their supplies of cross-border services within the EU under a single VAT return. This simplifies VAT compliance for businesses operating across borders.

Furthermore, the OSS system also helps to reduce administrative burdens for businesses by eliminating the need to register for VAT in multiple Member States. This is particularly beneficial for small and medium-sized enterprises (SMEs) who may not have the resources to navigate complex VAT regulations in different countries.

Another advantage of the OSS system is that it promotes fair competition among businesses operating in the EU. By ensuring that all businesses are subject to the same VAT rules and regulations, regardless of their location, the OSS system helps to create a level playing field for all market participants.

How to Register for OSS

Businesses can register for the One-Stop Shop (OSS) system through their local tax authorities. Once registered, businesses will receive a VAT identification number, which they can use to report their cross-border supplies of goods and services.

It is important to note that businesses must register for the OSS system in each EU member state where they make taxable supplies. Additionally, businesses must keep records of their cross-border supplies for a period of 10 years, in case of any audits or investigations by tax authorities.

Benefits of the OSS System for Businesses

The benefits of the One-Stop Shop (OSS) system include reduced administrative burden, simplified VAT compliance, and improved cash flow management. Businesses will also be able to avoid the need to register for VAT in multiple Member States.

In addition to these benefits, the OSS system also provides businesses with greater transparency and control over their VAT obligations. With the ability to file VAT returns and make payments through a single portal, businesses can easily track their VAT liabilities and ensure compliance with EU regulations. Furthermore, the OSS system allows businesses to benefit from the same VAT rates and rules as domestic businesses in the Member State where they are registered, providing a level playing field for cross-border trade.

Challenges with Implementing the New VAT Rules

While the new VAT rules will bring many benefits to businesses, there are also some challenges that need to be addressed. One of the main challenges is ensuring that businesses are fully aware of the new rules and how they will impact their operations.

Another challenge is ensuring that the new rules are implemented smoothly and without any disruptions to the EU market.

Top Tips for Compliance with the New VAT Rules

To ensure compliance with the new VAT rules, businesses should take the following steps:

• Register for the One-Stop Shop (OSS) system where applicable.
• Ensure that their IT systems are updated to reflect the new VAT rates and rules.
• Seek advice from their tax advisors or local tax authorities to ensure that they are fully aware of their obligations under the new rules.

Penalties for Non-Compliance with the New VAT Rules

Businesses that fail to comply with the new VAT rules may be subject to penalties and fines. The severity of the penalty will depend on the nature and severity of the non-compliance.

Impact of Brexit on the 2021 EU VAT Changes

The new VAT rules will apply to the UK, as the changes will take effect before the end of the Brexit transition period. However, the UK has its own VAT system, and it remains to be seen how the new rules will affect businesses operating between the UK and the EU.

Future of VAT in the EU

The new VAT rules represent a significant milestone in the ongoing work to reform the EU VAT system. However, there is still much work to be done to ensure that the system remains fair, efficient and sustainable for all businesses operating within the EU.

Overall, the new EU VAT rules represent a positive step forward for businesses operating within the EU. While there will be some challenges to overcome, the benefits of the new rules – in terms of reduced administrative burden and improved VAT compliance – should ultimately outweigh any difficulties. As ever, businesses should work closely with their tax advisors and local tax authorities to ensure that they are fully equipped to meet their obligations under the new rules.