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How Europe is using VAT to tackle cost of living crisis

VAT has emerged as one of the major tools at the disposal of the European Union (EU) as it looks to tackle the rising cost of living crisis across the continent.

With so many rate changes confirmed or reportedly under consideration, we’re asking tax professionals whether they are managing to stay on top of the latest levies and highlight the potential risks of applying incorrect rates to transactions.

Headline inflation across Europe hit 8.6% in June, up from 8.1% in May, with increases in both energy and food prices fuelling the surge.

Indeed, the inflation rate for energy alone was 42% in June, underlining the extent of price rises that many are facing.

Almost every country in Europe has responded to rocketing inflation by leveraging VAT; typically reducing rates to limit the financial pain for businesses and consumers alike.

Here are just 10 examples of rate changes and reactions from various countries:

Belgium: The VAT cut on heating has been extended until the end of 2022.

Bulgaria: VAT has been cut on energy and basic foods have been zero-rated.

Croatia: VAT on heating and basic foods was cut in April 2022.

Estonia: VAT on petrol and heating fuel was lowered on 30th April.

Ireland: Gas and electricity will be subject to reduced VAT of 9% for six months.

Netherlands: VAT has been reduced on energy and fuel duty cut until the end of the year.

Poland: VAT cuts on energy and food have been extended to 31st October 2022.

Spain: VAT on domestic electricity use will be cut further to 5%.

Turkey: VAT on food has been reduced from 8% to 1% and the rate on electricity cut to 8%.

UK: Discussions around a VAT rate cut remain ongoing following a recent fuel duty reduction.

Last month, the International Monetary Fund urged governments to avoid slashing VAT rates on fuels and food in an attempt to restrict inflation. It suggested that instead of tax subsidies, countries should offer targeted welfare support to those in need.

It’s not only in Europe that VAT cuts have been widespread, with nations across the world following similar strategies.

What does it mean for tax professionals?

A deluge of rate changes in a relatively short period of time – with the likelihood of many more to come – can become a huge administrative burden for tax teams that still manage such issues manually.

Does your team have the resources required to check every rate, every time it is used? Is it even fair to expect your skilled and experienced tax experts to do so?

If the answer to either question is ‘no’, we advise investing in an automated solution that will instantly apply the correct (and up-to-date) tax rate and code to every transaction. All with almost zero human input or time requirements.

In addition to the time and effort required from your team, manually applying tax rates to transactions also leaves your business at significant risk of non-compliance. One mistake and you could pay for it at audit.

It’s worth considering that the global spate of rate changes discussed here has been caused almost exclusively by market forces in just two industries: food and fuel. With hundreds more industries liable to VAT changes at any time, keeping rates up-to-date and transactions fully compliant is a challenge that will never disappear.