EU Parliament backs member states’ reduced VAT rate freedom

30 March 2022

In March 2022, the Parliament of the European Union backed the European Council’s agreement on extending reduced VAT rate setting powers to individual member states. 

This means that the proposed VAT law can now be adopted, and member states may commence entering this into their own legislation once gazetted. The deadline for all states to incorporate these changes will be 2025.

The new law will include:

• An updated list of goods and services (Annex III to the VAT Directive) to which member states can apply reduced VAT rates. New products and services added to the list include those that protect public health, are good for the environment and support the digital transition. Once these rules come into force, member states will for the first time be able to permanently apply one reduced VAT rate lower than 5% or exempt a small number of these items from VAT. 
• By 2030, remove the ability for member states to apply reduced rates and exemptions to goods and services deemed detrimental to the environment and the EU’s climate change objectives.
• Make derogations and exemptions for specific goods and services currently in place for historical reasons in certain member states, available to all countries to ensure equal treatment and avoid distortions of competition. 

The European Commission had already given member states unofficial permission to change VAT rates, which has led to member states such as Croatia and Poland temporarily reducing VAT rates on certain goods and services to combat inflation. However, the above decision will now allow member states to make these VAT rate changes permanent.