Amendments to the VAT Directive on reduced rates adopted
The Council has modernised the EU rules on VAT rates. Member states gain flexibility, and favourable regimes for environmentally harmful goods are being phased out.
In December 2021 the Council reached agreement on a proposal to adapt the EU rules on VAT rates. That amendment was formally adopted on 5 April 2022.
The new rules take account of member states' current needs and of present-day EU policy objectives, which have changed considerably since the old rules were introduced more than two decades ago. The changes are intended to give member states equal treatment and more flexibility in applying reduced and zero rates. Favourable regimes for environmentally harmful goods are also being phased out.
A modernised list
The Council has modernised the list of goods and services to which reduced rates may be applied, Annex III to the VAT Directive, taking account of the digital transformation of the economy.
Guiding principles included the benefit to the final consumer and the general interest. To prevent a proliferation of reduced rates, the number of eligible items has been limited. Equal treatment of all member states was chosen: derogations allowing some member states to apply preferential rates to certain products are extended to all member states, provided they are compatible with the agreed principles.
With the pandemic still fresh in mind, a new provision has been added to deal with future crises, enabling member states to respond quickly to exceptional circumstances such as pandemics, humanitarian crises and natural disasters.
The environment
Reduced rates or exemptions for fossil fuels and other goods with a comparable effect on greenhouse gas emissions will be abolished by 1 January 2030 at the latest. For chemical fertilisers and pesticides the end date is 1 January 2032, giving small farms more time to adapt.
The list has also been extended with environmentally friendly goods and services eligible for reduced rates, such as solar panels, electric bicycles and waste recycling services.
Place of supply
All services capable of being supplied to a customer electronically must be taxable where the customer is established or has their permanent address or usual residence, so as to secure taxation in the member state of consumption. The place of supply rules are being amended accordingly, with an addition to article 54(1) of the directive.
The changes take effect on 1 January 2025.