In December 2021, the Council of the European Union (ECOFIN) adopted a reform of the VAT Directive that grants Member States significantly more flexibility in setting national VAT rates. This marks one of the most substantial realignments of European VAT policy in decades – with potentially far-reaching consequences for taxation, competition, and sustainability.
What Has Been Decided?
Directive (EU) 2022/542 amended the VAT Directive 2006/112/EC, relaxing the previous restrictions on VAT rates:
- Member States may now apply up to two reduced rates below 15%,
- in addition, one rate below 5% or even a zero rate,
- and they are free to decide which goods or services these rates apply to, as long as they are listed in Annex III of the Directive.
As a result, the strict distinction between “standard rate” and “reduced rate” is gradually being dismantled. The previous standard range of 5% to 25% is being replaced by a product-specific flexibility model.
Political Background
ECOFIN’s objective was to enable Member States to use tax policy more strategically as an instrument of economic and social steering – for instance, to promote environmentally sustainable products or to ease the burden on low-income households. At the same time, the new freedoms are designed to prevent abuse and distortion of competition: all Member States must ensure that their VAT systems remain budget-neutral and compliant with EU law.
What Does This Mean in Practice?
For businesses and consumers, the reform could lead to greater price variation within the EU, depending on national tax policies. While sustainable food products could be taxed at 1% in one country, another might retain the traditional 10% or higher rate.
For tax administrations, the reform represents a structural shift: more complex classifications, potential adjustments to ERP systems, and new obligations in cross-border trade.
Conclusion
The flexibilisation of VAT rates represents a paradigm shift in European tax policy. It combines greater national fiscal autonomy with the challenge of maintaining EU-wide harmonisation – a balancing act that offers new policy opportunities but also carries risks for the unity of the single market. The “end of the standard VAT rate” has begun, though its full impact will only become clear in the years ahead.
