The history of VAT

The history of VAT in the European Union until 1993

On 11 April 1967 the first two VAT Directives were adopted, establishing a general, multi-stage but non-cumulative turnover tax to replace all other turnover taxes in the Member States. However, the first two VAT Directives laid down only the general structures of the system and left it to the Member States to determine the coverage of VAT and the rate structure.

It was not until 17 May 1977 that the Sixth VAT Directive was adopted which established a uniform VAT coverage. This guarantees that the VAT contributed by each of the Member States to the Community's own resources can be calculated. It still however, allowed Member States many possible exceptions and derogations from the standard VAT coverage.

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Moreover, it did not set out the rates of VAT to be applied in Member States with the result that these differ widely even today. Currently, there is a standard rate of between 15% and 25% (the maximum is based on a political commitment) and Member States may apply 1 or 2 reduced rates of at least 5%.

There are a number of temporary derogations, e.g. zero rates in the United Kingdom and Ireland . The VAT coverage also still differs from one Member State to another.

VAT and the Single Market - 1993 to now

The realisation of the single market in 1993 resulted in the abolition of controls at fiscal frontiers. To achieve this, the Commission proposed moving from the pre-1993 "destination based" system, where VAT is effectively charged at the rate of VAT applicable where the buyer is established, to an "origin based" system, with VAT being charged at the rate in force where the supplier is established. This would have effectively abolished fiscal frontiers within the EU.

This was, however, not acceptable to Member States as rates of VAT were too different and there was no adequate mechanism to redistribute VAT receipts to mirror actual consumption.

Therefore, until the conditions were right the Community adopted the Transitional VAT System which maintains different fiscal systems but without frontier controls. The intention is still eventually to have a common system of VAT where VAT is charged by the seller of goods - an origin based VAT system.

The transitional system is an origin based system for sales to private persons who can go and buy tax paid anywhere they like in the Union and take the goods home without having to pay VAT again.

There are some exceptions to this general rule however (e.g. the purchase of new means of transport and distance selling). For transactions between taxable persons it is still a destination based VAT system.