For experts and lawmakers in every territory, tax simplification is a holy grail. In a complex jurisdiction such as the EU, the stakes are particularly high. For example, Much More Than a Market, a report of last year from former Italian Prime Minister Enrico Letta, warned that tax fragmentation is undermining the Single Market. A few months later, the landmark Draghi report on EU Competitiveness complained that tax regimes across member states “remain substantially unaligned”, presenting an obstacle to growth.

In the European Parliament, the body tasked with examining issues around tax, including simplification, is the Subcommittee on Tax Matters (FISC). Significantly, one member of FISC is also a long-time member of ICAEW. That is Michalis Hadjipantela MEP, former Minister of Health for the Republic of Cyprus – now an EU Parliamentary representative for the nation’s Democratic Rally party.

Earlier this year, Hadjipantela called on the support of his professional body by inviting ICAEW to contribute evidence to an EU Parliamentary review. The matters at hand: lack of simplification in key areas of the EU tax system and the resulting effects on business, especially SMEs.

In April, ICAEW Head of Tax Strategy Frank Haskew provided Hadjipantela with an initial, written response to feed into the discussion. Subsequently, ICAEW invited Stephen Dale – Chair of ICAEW’s VAT Committee, plus board member and Past-Chair of the International VAT Association – to add oral evidence in a Parliamentary hearing. Both the written response and Dale’s in-person input focused on ideas for simplifying a vital component of the EU tax system: VAT.

Quest for certainty

ICAEW’s written response noted that the already complex terrain of EU VAT law was made even more so by the recently adopted VAT in the Digital Age (VIDA) Directive. According to the response, the legislation has added more options and derogations, creating further burdens for businesses that work across borders. As such, it argued, options and derogations permitted under the directive should be progressively removed. In tandem, to reduce VAT fraud and the VAT gap, member states must enhance cooperation and make greater use of digital technologies.

Haskew’s other main points concerned neutrality, uniformity and sustainability. Making the EU VAT system 100% neutral – with input tax fully deductible – would ensure that businesses are not unfairly penalised by VAT costs they cannot reclaim, he wrote. Meanwhile, a uniform approach to supplies of goods and services, including streamlined definitions and consistent application of key concepts, would foster a simpler, more effective VAT system. In addition, he urged legislators to pave the way for a more sustainable and equitable VAT system, via means such as scrapping VAT on goods supplied free of charge for social and/or environmental benefit.

Speaking to Insights, Dale explains that ICAEW’s drive for simplification broadly aligns with the thrust of VAT After VIDA: a report of last December from the European Commission’s VAT Expert Group (VEG), on which Dale sits. In the report, VEG considers what the EU VAT system could look like in the wake of VIDA’s adoption and proposes ideas for further improvement. Simplification is one of its biggest themes.

“We took a view at ICAEW that there was a clear need for certainty,” Dale says. “SMEs are the major motors of growth into and across the EU and putting barriers in their way only hinders that growth. SMEs won’t develop within their own borders, or move to operate across EU territories, if they don’t know how the tax regime works in their own country – let alone on the other side of the border.”

To boost certainty, VEG’s report urged lawmakers to reinforce the powers of the Commission’s VAT Committee, where representatives from each member state discuss and reach positions on difficult technical issues. At present, its decisions are not legally binding so the only way a business can obtain legal certainty on how a tax provision should be interpreted is through the onerous process of persuading a national court to seek an opinion from the European Court of Justice.

Dale notes: “VEG also suggested that the EU’s voting procedure for tax legislation should be changed from a requirement for unanimity to qualified majority voting, or another workable alternative. There is a clear need to get tax legislation adopted much more quickly, so that the EU can move forward more efficiently.”

Valuable contributor

ICAEW’s contributions were fashioned into amendments to an official report for the Committee on Economic and Monetary Affairs – in which FISC sits – entitled The role of simple tax rules and tax fragmentation in European competitiveness. Hadjipantela delivered the report to the Committee in his role as Rapporteur. It is now awaiting Parliamentary discussion.

Hadjipantela suggests that change is overdue. According to a study from the Commission, in 2019, businesses in the EU 28 incurred an average annual tax compliance cost equivalent to 1.9% of their turnover. Simplification can significantly ease that burden, says Hadjipantela, allowing SMEs to focus on creating jobs, innovating and contributing to economic resilience and competitiveness.

Hadjipantela is grateful for ICAEW’s input to the simplification debate. “ICAEW is a leading professional body with extensive expertise in accounting and taxation,” he says. “The support it receives from a network of experienced practitioners, as well as its ability to draw on real-world experience, makes it a valuable contributor to discussions on tax reform.” 

Inviting ICAEW to participate ensured that the debate benefitted from practical perspectives, enabling the committee to understand how policy proposals affect implementation. 

Hadjipantela notes that, while he was involved primarily as a member of European Parliament representing Cyprus, he is appreciative of the role his membership has played in enriching his knowledge and informing his political understanding. Particularly, his knowledge of finance and tax matters allows him to stay informed and comprehend complex VAT and broader tax policy issues.

“As parliamentarians, we should remain open and transparent to receiving information and proposals from stakeholders, which we should evaluate with an independent merit and decide whether and how to use them.”

Dale adds that having someone with an accounting and tax background in the Subcommittee is immensely helpful. “We often find that individuals in similar positions are politicians first and foremost – perhaps exclusively – who look at specialist issues from a purely political, rather than technical, perspective. Michalis has excelled in the latter.”