EU isn't standing still in making life simpler for business whilst protecting consumers.


Whilst the focus in the UK on trying to figure out the shape and timing of Brexit and how we are going to cope with the seismic changes, the EU is quietly working towards making Europe a better place to do business.

It’s a continuous process – and here we take a look at progress made in just one week.  Last week saw: greater flexibility on VAT rates; reduction in red tape for small businesses; and EU-wide harmonisation of payment services.

The present EU VAT rules date back to 1992 and are “out of date and restrictive”.

European Commission proposes a single EU VAT area – which will also tackle the €50 billion annually lost VAT through misunderstanding and fraud across the EU.

Member States are to get autonomy on rates regarding VAT exceptions (known as ‘VAT derogations’).  Smaller companies today suffer disproportionately in meeting compliance costs - measured at 11% higher when compared to the cost of domestic only trading.  Smaller players are hit hardest - and this has proven a real obstacle to growth.  Small businesses make up 98% of companies in the EU – and the simpler VAT rules will cut their compliance costs by a fifth.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "we are taking another step towards creating a single VAT area for Europe with simpler rules for our Member States and companies…at the same time reducing red tape for small businesses operating across borders, helping them to grow and create jobs."

Details of the new VAT regime are outlined at the end of this note [1].

Meanwhile, cheaper, easier and safer electronic payments came into effect with the updated ‘Payment Services Directive’ (PSD2) on 13 January 2018.

PSD2 bans surcharges for consumer debit and credit card payments and will: “promote innovative online and mobile payments”, according to the European Commission.

Valdis Dombrovskis, EC vice-president responsible for Financial Stability, Financial Services and Capital Markets Union: "This could save more than EUR 550 million per year for EU consumers – and consumers will also be better protected when they make payments."

It is not a coincidence that EU is moving to promote business and growth through simplification for business and strengthening support for consumers.  Brexit supporters must take some credit for prodding the union into action – but there will be a cost to the UK arising from the ‘unexpected consequences’ of an increasingly harmonised Europe.

[1] More Details


Member States can currently apply a reduced rate as low as 5% to two distinct categories of products in their country.  Member States may apply further reduced rate VAT derogations.

In future standard VAT rate must be a minimum 15%.  Member States will be able to put in place: two separate reduced rates of between 5% and the standard rate chosen by the Member State; one exemption from VAT (or 'zero rate'); one reduced rate set at between 0% and the reduced rates.

The current, complex list of goods and services to which reduced rates can be applied would be abolished and replaced by a new list of products (such as weapons, alcoholic beverages, gambling and tobacco) to which the standard rate of 15% or above would always be applied.

Member States will have to ensure that the weighted average VAT rate is at least 12%

Reducing VAT costs for SMEs

Under current rules, Member States can exempt sales of small companies from VAT provided they do not exceed a given annual turnover.  This varies from one country to the next.  Growing SMEs lose their access to simplification measures once the exemption threshold has been exceeded.  As these exemptions are available only to domestic players, there is no level playing field for small companies trading within the EU.

Proposed regime introduces: €2 million revenue threshold across the EU for simplification measures, whether or not businesses are exempted from VAT; Member States may free all small businesses qualifying for a VAT exemption from obligations relating to identification, invoicing, accounting or returns; a turnover threshold of €100,000 which would allow companies operating in more than one Member State to benefit from the VAT exemption.

Payments Services Directive (PSD2)

The new rules: prohibit surcharging for payments with consumer credit or debit cards, both in shops or online; open the EU payment market to companies offering payment services; introduce strict security requirements for electronic payments and for the protection of consumers' financial data; further enhance consumers' rights - including reducing liability for non-authorised payments and introducing an unconditional ("no questions asked") refund right for direct debits in euro.

PSD2 (Directive 2015/2366/EU) provides for “modern, efficient and cheap payment services and enhanced protection for European consumers and businesses.”  The revised Directive adapts the rules to cater for emerging and innovative payment services, including internet and mobile payments.

John ShuttleworthComment