New rules to give European Union member states more flexibility to set Value Added Tax (VAT) rates and to create a better tax environment to help SMEs flourish were proposed by the European Commission on January 18.

The proposals are the final steps of the Commission’s overhaul of VAT rules, with the creation of a single EU VAT area to dramatically reduce the €50bn lost to VAT fraud each year in the EU, while supporting business and securing government revenues.

According to the European Commission, the EU’s common VAT rules, agreed by all member states in 1992, are out of date and too restrictive. It said it is now making good on its pledge to give EU member states more autonomy on rates. Countries will be on a more equal footing when it comes to some existing exceptions to the rules, known as VAT derogations.

The Commission said it is also addressing the problem of smaller companies suffering from disproportionate VAT compliance costs. Businesses trading cross-border face 11% higher compliance costs compared to those trading only domestically, with smaller players hit hardest. This has proven to be a real obstacle to growth, as small businesses make up 98% of companies in the EU.

“Three months ago the Commission proposed to overhaul the EU VAT rules moving towards a definitive VAT regime,” said Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue. “It means introducing the principle of charging VAT at the country of destination. Today’s proposals for VAT rates are scheduled to enter into force once the definitive regime is in place.”

According to Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, this is another step towards creating a single VAT area for Europe. “These proposals will give EU countries greater freedom to apply reduced VAT rates to specific products or services. At the same time they will reduce red tape for small businesses operating across borders, helping them to grow and create jobs,” he said.