The European Commission is proposing changes to VAT deduction rules that could significantly affect how businesses settle their tax accounts. The consultations cover three areas: taxation of passenger cars, trade in second-hand goods and donations.
On the one hand, the proposed solutions are intended to support climate-policy objectives and the circular economy; on the other, they would change the existing rules for VAT settlements.
This raises the question whether using tax to pursue environmental and social objectives will not further complicate the system and create additional departures from the principle of VAT neutrality.
The European Commission’s proposal undoubtedly fits the direction of EU climate-policy changes. In principle, the objective of supporting the circular economy appears justified.
The greatest doubt, however, concerns whether the VAT system should be used to pursue these objectives and whether the proposed mechanisms will lead to further departures from the principle of tax neutrality.
From the perspective of businesses, it will be particularly important whether the reform actually simplifies settlements or instead introduces new criteria and conditions for VAT accounting.
In this context, it seems particularly important to organise the rules concerning second-hand goods. The current solutions are complicated, and applying the margin scheme imposes additional record-keeping obligations on taxpayers. Harmonising VAT deduction rules could reduce tax risk and compliance costs, especially for SMEs. At the same time, the change should ensure genuine tax neutrality between trade in new and second-hand goods, without creating new preferences that distort competition.
The proposal concerning donations also deserves particular attention. From a VAT perspective, it is difficult to justify a situation in which destroying a fully usable product may be more economically rational than donating it, for example, for social purposes.
The success of the proposed preference will, however, depend on the detailed rules for applying it. The key issue will be to define the conditions for applying the preference precisely, so as to increase businesses’ willingness to donate products to social organisations.
The most far-reaching proposal is to make the right to deduct VAT on passenger cars dependent on the type of powertrain. A preference for zero-emission vehicles would mean departing from the classic approach to VAT neutrality in favour of using the tax as an environmental-policy instrument.
From the perspective of businesses, this change would directly affect the economic attractiveness of different types of vehicles. Companies choosing electric cars would obtain a VAT deduction preference, while using combustion-engine vehicles would become far less favourable from a tax perspective.
The final balance of the proposed changes will therefore largely depend on how the detailed rules for their application are constructed. The reform could bring tangible benefits to businesses that follow the direction set by EU climate policy. On the other hand, the burden of the proposed changes may be felt more strongly by businesses whose operating model relies on solutions that are less favoured by the new regulations, which may concern a very broad group of taxpayers.