EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 2 May 2019, Luxembourg requested an authorisation to continue to exempt from VAT taxable persons whose annual turnover is below a certain threshold, as provided for in Article 285 of the VAT Directive, and to increase this threshold from EUR 30 000 to EUR 35 000.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 21 June 2019 of the request made by Luxembourg. By letter dated 24 June 2019, the Commission notified Luxembourg that it had all the information it considered necessary for the appraisal of the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Chapter 1 of Title XII of the VAT Directive allows for the possibility for Member States to apply a special scheme for small enterprises, which includes the possibility to exempt taxable persons below a certain annual turnover. Taxable persons falling under this exemption do not have to charge VAT on their supplies and, consequently, cannot deduct the VAT on their inputs.

The possibility of applying special VAT rules including exemptions or graduated tax relief to small undertakings was first introduced by Article 14 of Council Directive 67/228/EEC. Member States which did not make use of the option provided for under that provision were allowed subsequently, according to Article 24(2)(b) of Directive 77/388/EEC now recast as the first paragraph of Article 285 of the VAT Directive, to only exempt from VAT taxable persons whose annual turnover is no higher than EUR 5 000 or the equivalent in national currency. Pursuant to the second paragraph of Article 285 of the VAT Directive, those Member States may also grant graduated tax relief to taxable persons whose annual turnover exceeds the ceiling fixed by them for its application.

Until the end of 2012, Luxembourg exempted from VAT taxable persons whose annual turnover was no higher than EUR 10 000. In parallel, Luxembourg made use of the option pursuant to the second paragraph of Article 285 of the VAT Directive by granting graduated tax relief to taxable persons whose annual turnover was between EUR 10 000 and EUR 25 000.

Subsequently, Luxembourg requested and obtained a derogation pursuant to the first paragraph of Article 285 to apply a turnover threshold of EUR 25 000 as regards the exemption scheme for small businesses whilst at the same time abolishing the application of the graduated tax relief. Council Implementing Decision 2013/677/EU authorised Luxembourg to apply the derogating measure mentioned above until 31 December 2016. Council Implementing Decision 2017/319/EU authorised Luxembourg to extend the expiry date of the derogating measure to 31 December 2019 and, at the same time, increase the threshold from 25 000 to EUR 30 000. The present request from Luxembourg to prolong further the expiry date of the derogation while increasing the threshold from EUR 30 000 to EUR 35 000 is based on the same grounds as those presented in the previous requests. In particular, Luxembourg maintains that the derogating measure reduces the administrative burden for small businesses and tax administration alike. In this regard, the derogating measure simplifies the procedure for collecting tax and hence falls within the objectives of the first subparagraph of Article 395 (1) of the VAT Directive.

Luxembourg stresses that the derogation requested is in line with the philosophy of the 2018 Commission proposal on new simplification rules in respect of VAT for small businesses, insofar as the proposal allows Member States to set to no higher than EUR 85 000 (or the equivalent in national currency) the annual turnover threshold required for an exemption from VAT.

According to Luxembourg, the special measure pursued would only have a negligible effect on the overall amount of VAT revenue collected at the stage of final consumption (not more than 0.1%), as required by the second subparagraph of Article 395(1) of the VAT Directive. More specifically, it is reported that in 2017, 105 taxable persons with a turnover of between EUR 10 000 and EUR 30 000 made use of the exemption (against 64 in 2015 and 73 in 2016). For that year, this number corresponds to 0.14% of taxable persons registered for VAT. Luxembourg estimates the maximum loss of VAT revenue due to the exemption at EUR 271 525.60. This amount represented 0.01% of the total amount of VAT receipts for 2017. Luxembourg expects that an increase of the threshold to EUR 35 000 could affect 1106 taxable persons, which would account for 1.5% of taxable persons registered for VAT in 2017. In the hypothesis that none of those taxable persons opted for normal VAT treatment, the revenue loss resulting from an increase of the exemption threshold from EUR 30 000 to EUR 35 000 should not exceed 0.1% of the total VAT revenue.

Based on the information provided by Luxembourg, it appears that the aim of the request to extend the derogating measure is to release small businesses from many of the VAT obligations under the normal VAT arrangements as well as to reduce the burden of the tax administration in terms of tax collection and the auditing of small businesses. This could allow the tax administration to focus its control activities towards larger taxable persons. The derogating measure is thus in accordance with the first subparagraph of Article 395(1) of the VAT Directive, which allows Member States to introduce special measures derogating from its provisions in order to simplify the procedure for collecting VAT. In this context, it is noted that the measure is and will remain optional for taxable persons.