Chartered accountant Clement Keys is warning that EU plans to adopt a 'destination' based VAT system will create more paperwork and say that internet-based businesses will be hit hardest.   

The current VAT system is based on EU legislation which is applied by the national government in each member state. Although this is flexible, enabling member states to have different rules, the EU Commission's Green Paper 'On the future of VAT - Towards a simpler, more robust and efficient VAT system' suggests it is so complex that businesses are dissuaded from intra-EU trading.  

"The Commission's aim is to harmonise the treatment of VAT across the 27 member states and make it more compatible with a single market economy while maintaining the capacity to raise revenue and reducing the cost of compliance," says director of VAT Services Steven Simmonds.

"Currently we are using a 'reverse charge' system to collect VAT, which is complex and not terribly efficient, but switching to a 'destination' based approach would make life even more difficult, especially for internet businesses that sell across Europe and international transport companies." 

Under the current VAT regime domestic supplies are treated differently to intra-EU supplies, which means the system is open to fraud. The Green Paper proposes that VAT is paid at the prevailing rate in the member state of destination - where the goods are delivered - even though this will have cash flow implications and an entirely new reporting structure will be necessary.

With a 'destination' based VAT system, an internet business trading above the distance selling threshold in any single EU state (varies between €-35000 - 100,000) would need to register for VAT in that country. This will be difficult to track, particularly when more countries join the EU, and because different rules apply in different member states, businesses will encounter extra red tape because of the additional reporting and administration required.

Professional tax bodies, including the Chartered Institute of Taxation and the Institute of Indirect Taxation, are responding to the Green Paper, although the Commission is inviting comment from all stakeholders. Clement Keys is urging businesses to have their say before the consultation period expires at the end of May.

"The move to a 'destination' based tax system would affect all kinds of business and we do not believe it would be beneficial, especially in the current economic climate," adds Mr Simmonds.

"Internet-based businesses are some of the fastest growing and more and more are becoming global organisations. We believe any change to the way in which VAT is collected should encourage this kind of enterprise, not stifle it, and that the EU Commission should be looking to implement a simpler VAT system not one that is even more complicated."