The European Commission issued a paper on 30 October 2014 outlining ideas on creating a more effective VAT system that is more in line with the objectives of the single market in the EU. The intention is to create the definitive VAT regime that will be better aligned to the needs of business and be more effective in preventing fraud. The document has been produced in consultation with groups of stakeholders and includes options for designing the VAT regime in the future. This amounts to an attempt to redesign the entire EU VAT regime rather than making adjustments in certain areas of VAT.

When the single market in the EU was established in 1992 the intention was to bring about a VAT system for internal EU trade that would be similar to a national system. This would effectively treat the EU as a single country for VAT purposes. The system would use the principle of taxation at origin in exactly the same way as a national VAT system.

This however was not possible at the time either technically or politically and a transitional system was put in place that exempted cross-border supplies of goods within the EU but taxed intra-EU purchases in the member state in which the purchase took place. This transitional system has however proved to be prone to fraud, such as the missing trader intra community fraud, which has cost billions of Euros to member states. The system has also been complex for businesses to administer.

The European Commission is therefore prioritizing the creation of a new VAT system that will be suited to the needs of modern business. However consultations have led to the conclusion that an origin-based VAT system is not feasible for the EU. The new system will therefore be based on the principle of destination, in other words the principle that VAT is charged at the point of destination of the goods supplied.

The Commission has suggested alternative ways in which reform of the VAT system could be achieved. These options are: a system where the supplier charges and pays VAT, the supplies being taxed by reference to the destination to which they are delivered; a system where the supplier charges and pays VAT and the supplies are taxed by reference to where the supplier is established; a system where the customer is liable for the VAT (under a reverse charge system) and supplies are charged by reference to where the customer is based; or a method where the customer is liable for the VAT and taxation takes place at the point where the goods are delivered. Alternatively, the VAT system currently in force could be maintained with some modifications.

The European Commission is now carrying out a more thorough assessment of the implications of each option and looking at the impact of each of the five alternatives on business in the EU and on the member states. Following this evaluation the Commission will present its ideas on the future VAT system in the spring of 2015.