New amendments adopted in the VAT Directive

On 5 April 2022, the Council of the European Union adopted Council Directive (EU) 2022/542 amending Directives 2006/112/EC and (EU) 2020/285 as regards rates of value added tax ('The Amending Directive'). The new rules allow for an overhaul of VAT rates in all member states thus, permitting wider use of reduced rates, including the use of zero rates for essential products such as food, pharmaceuticals and medical products. The newly adopted rules enter into force 20 days after their publication in the Official Journal of the European Union, which means that member states will be allowed to apply the new system from that date on.

In addition, it is assumed that environmentally harmful goods such as fossil fuels and chemical fertilisers and pesticides will be excluded from the reduced rates as of 1 January 2030 and 1 January 2032, respectively.

The aim of the amendments is to modernise the existing rules on VAT rates by giving member states more flexibility in setting their VAT rates.

As indicated in the preamble of the Amending Directive, the changes introduced should be considered along several lines.

Given that some member states apply reduced rates of no less than 12% to certain goods and services, a provision should be set for all member states to have this option under the same conditions. They should thus, be aimed at securing benefits for the final consumer and pursuing objectives of general interest.

Member states should still apply a normal or standard rate of at least 15 % and may apply two reduced rates of at least 5 % for items included in the list in Annex III to the VAT Directive, which now has a wider scope. In addition, each Member State may set a super-reduced rate (lower than 5%) and a 0% rate for products covering essential needs such as foodstuffs, medicines, pharmaceuticals, and solar panels.

The new rules contain provisions that aim to limit the spread of reduced rates in order to avoid a reduction in the prix-fixe. For this reason, member states cannot use all Annex III categories at the same time. The use of the two regular reduced rates is limited to a maximum of 24 categories of the amended Annex III. The use of the super-reduced rates and 0% rates is also limited to seven categories of the main supplies in Annex III of the VAT Directive.

Next, the new changes aim at strengthening healthcare and its systems. Reducing the VAT burden on this largely VAT-exempt sector can help achieve this objective. To this end, the scope of the two medical categories of Annex III is extended, thus widening the possibility of using reduced rates.

Annex III includes pharmaceutical products used for medical and veterinary purposes, including products used for contraception and female sanitary protection, as well as medical equipment, appliances, devices, articles, aids and appliances of protection. The inclusion of these goods as essential auxiliary aids removes the current restriction on products intended for the exclusive use of disabled persons. A super-reduced rate or 0% rate will also apply to these categories.

Also, the envisaged changes to Annex III include goods such as solar panels, electric bicycles, waste treatment, and recycling services, which are intended to support environmental processes and policy. Member states will be allowed to apply a reduced rate for the supply and installation of high efficiency, low emission heating systems that meet the criteria of environmental legislation, with solar panels eligible for a 0% rate.

Reduced VAT rates or exemptions on fossil fuels and other commodities with a similar impact on greenhouse gas emissions will be phased out by 1 January 2030. Reduced VAT rates and exemptions on chemical fertilisers and chemical pesticides will be phased out by 1 January 2032 to give small farmers more time to adapt to the changes.

The Directive also provides for the possibility of setting reduced rates for internet access services. Reduced tariffs for live broadcasting of cultural and sporting events will be introduced by 2025. Thereafter, these services will be taxed for VAT purposes where the virtual visitor is located.

Kambourov & Partners – Tax Consulting will continue to monitor the implementation of the VAT rates amendments, as well as the effect they will have on businesses, their impact on the healthcare sector, and the tax relationship as a whole.