Definitive reform of the EU VAT system

Proposals have been announced to introduce a destination based system for cross-border supplies of goods within the EU by 2022.

The EU Commission has announced plans to move further towards a “definitive” VAT system based on the destination principle. Under these plans, businesses would charge VAT on cross-border B2B transactions at the rate of VAT in force in the customer’s Member State and account for such VAT domestically. Member States would then be required to transfer VAT collected to the destination State.

It is hoped that these reforms will help bring VAT fraud, particularly missing trader and carousel fraud, under control. The Commission proposes that the definitive regime should be implemented in 2022, with a number of “quick fixes” being introduced with effect from 2019.


The VAT system currently in place has, in many ways, always been a temporary or transitional regime. There has been a long-standing desire to move to a “destination based” VAT system, where the VAT charged on cross-border transactions is based on the customer’s location. On B2B transactions, this is currently effected through the use of zero-rating, under which no VAT is charged by the supplier but instead a business receiving a supply of goods from another Member State is obliged to account for VAT locally on a taxable acquisition of goods.

The problem with these rules, however, is that they have provided opportunities for VAT fraud. In particular, since a B2B supply of goods cross-border is VAT free, this enables fraudulent businesses to simply fail to account for VAT on their acquisition, whilst charging VAT on a domestic on-supply of those goods. The fraudster would then simply disappear, keeping the VAT collected from the domestic supply and without having accounted for any VAT at all on their purchase. This is “missing trader fraud” at its simplest. Carousel fraud involves the circulation of such goods several times before the fraudulent business disappears.

Moving to a destination based system of VAT would make such fraud more difficult as, unlike now, the “missing trader” would be charged VAT on the cross-border supply.

EU Commission proposals

The EU Commission’s proposals would involve requiring businesses making B2B cross-border supplies to charge VAT on such supplies at the rate in force in the Member State of the recipient, whilst accounting for such VAT locally to their own Member State. Under this system, a business would be able to make declarations and payments using their own single domestic registration and according to their domestic rules and administrative procedures. This would include being able to prepare VAT invoices according to their domestic rules, even when trading cross-border. Member States would then need transfer VAT collected to the destination Member State.

The EU Commission will now word on a detailed legal proposal including amendments to the 2006 VAT Directive during 2018, with a view to implementation in 2022.

In addition, the Commission is proposing four “quick fixes” to come into force from 2019 to help Member States deal with VAT fraud. These quick fixes involve:

  • simplification of the rules dealing with sales of goods stored in another Member State
  • simplification of triangulation arrangements
  • new harmonised rules for proof that goods have been transported cross-border, and
  • clarification that, in addition to proof of transport, the VAT number of the business recipient is required.

No further details are provided of these “quick fixes” at present. However, a number of these changes will be limited “Certified Taxable Persons” - a new category of trusted business that will benefit from simpler VAT administrative rules.


Proposals to deal with the enormous problem of VAT fraud in the EU are in many ways long overdue. Until now, Member States have needed to deal with these problems by introducing specific rules dealing with supplies of particular goods (such as computer chips and mobile phones) on a piecemeal basis and involving derogations from the EU. As such, a comprehensive approach to intra-EU missing trader fraud is much needed.

However, the solution, involving domestic accounting for VAT on cross-border supplies with the transfer of the VAT receipts to the destination State is one that involves a large number of administrative problems and, as such, has been slow to be implemented. Recent experience with equivalent systems in relation to supplies of e-services and the one-stop-shop model and development of IT systems capable of dealing with these complexities have now emboldened the Commission to propose a move to the destination model. The Commission notes that further changes will be necessary as regards the rules providing for administrative cooperation between Member States and also in terms of substantial IT developments and this accounts for the long lead-in time for the proposal.

It should be noted that the Commission’s proposals do not affect the rules on B2C supplies.

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