Towards an [Unlawful] Modernised EU VAT Rate Policy

In late 2015, the European Commission announced what can only be characterised as a monumental U-turn on VAT rates policy. After decades of advocating the benefits of harmonisation and rationalisation of VAT rates across the EU Member States, and after many failed legislative attempts at achieving it, it has announced its intention to do the opposite, namely to disharmonise VAT rates across Europe. The announcement was followed by the VAT Action Plan, and a public consultation on the reform of VAT rates, which, under the guise of modernisation and consistency with the destination principle, presented two options for reform, both of which would give Member States further freedom and flexibility in the application of reduced rates, as follows:

1. Under the first option the list of goods and services eligible for reduced rates would be extended and reviewed regularly so as to adapt existing rules to the modern economy, and evolving political priorities.
2. The second option envisages the abolition of the pre-defined list of goods and services to which reduced rates can be applied, as part of a decentralised system, under which Member States would be free to set their domestic reduced rates and to apply them to their choice of goods and services.

Against this background, the aim of our new article is not to restate the benefits of VAT rate harmonisation, but to assess whether the EU has legislative competence to approve disharmonising VAT legislation. The article concludes that Article 113 TFEU could not be used as a legal basis for a Directive aimed at disharmonising VAT rates, and that any such Directive would therefore lack legal basis and be unlawful under the EU constitutional principle of conferral of powers.