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The goods and services eligible for reduced rates should aim at the benefit of the final consumer and pursue objectives of general interest. To avoid unnecessary complexity and a subsequent rise in business costs, in particular for intra-Community trade, it should be clear that once goods and services are selected accordingly, reduced rates would normally be applicable along the entire commercial chain.
Updated list goods & services for which reduced rates are allowed
The Council updated and modernized the list of goods and services for which reduced VAT rates are allowed (Annex III of the VAT directive), taking into account the digital transformation of the economy. The update of the list was driven by a number of principles, such as the benefit of the final consumer and the general interest. However, to prevent a proliferation of reduced rates, the Council decided to limit the number of items to which reduced rates could be applied. The Council also decided to ensure that all member states are treated equally. To achieve this, existing derogations that allowed some member states to apply preferential rates for certain products were opened to all member states, provided that they are compatible with the agreed principles.
A new provision in the VAT directive was also added to address possible future crises and to enable member states to respond swiftly to exceptional circumstances, like pandemics, humanitarian crises or natural disasters.
Furthermore, the Council agreed to phase out reduced VAT rates or exemptions on fossil fuels and other goods with a similar impact on greenhouse gas emissions, by 1 January 2030. Reduced rates and exemptions for chemical fertilizers and chemical pesticides will end by 1 January 2032, to give small-scale farmers more time to adapt. In addition, the Council introduced environmentally-friendly goods and services in the list for which reduced rates are allowed, such as solar panels, electric bicycles and waste recycling services.
New possibilities for reduced VAT rates
Member States will continue to apply a standard rate of VAT above 15%. However, based on the proposal they will now also have the possibility to apply two reduced rates as low as 5% to goods and services in up to 24 categories included in an updated and modernised Annex III of the VAT Directive. They may also apply one reduced rate lower than 5% and one exemption (‘zero rate') to a maximum of seven categories on the list considered to cover basic needs (mentioned in points 1,2,3,4,5,6 and 10c) like for example foodstuffs, medical equipment and books.
In particular, the list has been updated to include:
- digital services that previously did not qualify for reduced rates such as internet access and livestreaming of cultural and sports events;
- goods which protect public health and that have shown to be crucial tools in the fight against COVID-19 and that could prove useful in future crises, such as personal protective equipment, masks and certain medical equipment; as well as more items considered as essential aids for the disabled;
- certain items such as bicycles, green heating systems and solar panels installed in private homes and public buildings, which can have a positive impact on the EU's climate change priorities;
- diverse products and services deemed appropriate and useful by Member States, which are driven by the general interest of public policy objectives.
Reduced rates for goods and services that were permissible under the previous system but are deemed out of step with the European Green Deal will have to be ended in those Member States that apply them by 2030 at the latest. Member States will need to end any derogations that are not in line with the EU's Green Deal by 2030.
The new rules will be sent to the European Parliament for consultation by March 2022. Member States will need to adopt them and, after publication in the Official Journal of the European Union, the new rules will come into force.
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Daniëlle van der Meulen-Idema
Sr. VAT Specialist
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