EU VAT: transforming challenge into opportunity

Spanning 27 countries, the European Union (EU) VAT system is a complex tax framework, requiring careful navigation to avoid costly missteps. In response to escalating compliance challenges, the EU has instituted sweeping VAT reforms, with new ViDA (VAT in the Digital Age) changes starting to take effect.

For forward-thinking global businesses, tax compliance is no longer a mere back-office function – it’s a strategic imperative. Given the rapid changes in EU VAT legislation, companies need to act quickly, adapting systems and processes, and leveraging the right expertise to ensure compliance in various jurisdictions.

In this guide, we explore the current VAT landscape across the EU, upcoming legislative changes and the strategies multinationals need to adopt to ensure successful compliance on the expansion journey.

1. What is VAT and how has it evolved in the EU?

In simple terms, VAT is a tax on goods and services paid at any time within the transactional chain and ultimately borne by the end consumer. Since it was first introduced in France in 1954, VAT has revolutionised tax systems around the world, proving to be an effective and reliable source of government revenue. VAT accounts for more than 20% of global tax revenue, and according to the OECD, 175 countries have now implemented VAT frameworks.

In the European Union, the world’s largest single market, VAT is governed by the EU VAT Directive (2006/112/EC). The VAT Directive is binding on all Member States, but countries can adapt its provisions to align with local legislation and requirements.

EU VAT implementation timeline:

• Introduction of VAT: in the 1960s, the concept of VAT spread quickly across Europe, with the EU introducing the First and Second VAT Directives in 1967 to harmonise indirect taxation across Member States. The Sixth Directive (1977) standardised rules and was replaced by the EU VAT Directive (2006/112/EC)
• The establishment of the Single Market (1993): to create an integrated economic zone, the EU abolished intra-EU border controls, shifting VAT collection to the destination principle (this ensures that revenue goes to the country where the goods or services are consumed). The EU also introduced reverse-charge and triangulation mechanisms to simplify cross-border trade
• The impact of e-commerce: in 2015, the EU introduced new VAT rules requiring digital services to be taxed in the country where the consumer is located, rather than where the supplier is based. In 2021, the EU eliminated the €22 low-value import exemption, and the One Stop Shop (OSS) – which allows businesses to declare and pay VAT through a single portal – was expanded for B2C sales of goods
• New VAT reforms: in March 2025, the EU adopted the VAT in the Digital Age (ViDA) modernisation package, with the goal of digitising and simplifying VAT compliance. The package introduces mandatory e-invoicing, real-time digital reporting, updated rules for the platform economy and single VAT registration

2. Why is EU VAT especially challenging?

VAT compliance is one of the key challenges companies must take into account when doing business in the EU. Some of the reasons for this include:

• Diverse national rules – each Member State enforces the directive through its own legislation and processes, resulting in increased fragmentation and complexity
• Multiple VAT rates – VAT rates for the same goods and services vary across Member States, creating additional compliance challenges for multinationals
• Cross-border complexity – varying legal systems, languages, filing requirements and e-commerce rules can complicate EU VAT compliance; companies are often required to engage local expertise and bolster translation capabilities to navigate VAT laws effectively
• A complex and fast-changing system – the combination of national and EU rules makes the EU’s tax framework particularly complex and frequent rule changes demand greater vigilance

3. What are the key risks for businesses trading across borders?

When operating in the EU, businesses trading across borders can face several VAT-related risks which must be carefully managed to avoid financial penalties, operational disruption and reputational damage.

Common risk factors include:

1. Non-compliance penalties: companies that fail to comply with VAT rules – either wilfully or unintentionally – can incur a range of penalties including:

• Fines for late registration or filing (eg €2,500 to €5,000 in Bulgaria; 120% to 240% of the VAT due in Italy)
• Retroactive VAT assessments with interest (eg up to 150% in some cases in Spain depending on the offence)

2. VAT fraud exposure: VAT fraud is a major risk for businesses operating in the EU, with an estimated €50 billion lost to cross-border VAT fraud annually. Fraud risks include:

• Carousel fraud: Circular trading – the practice of trading goods back and forth between the same companies to manipulate the VAT system – cost the EU €61 billion in 2021
• Overclaim fraud: This occurs when companies inflate VAT claims to obtain a larger refund than they are entitled to

3. Cash flow issues: businesses often face cash flow challenges while waiting for VAT refunds to be processed by tax authorities; delayed VAT refunds can strain liquidity.

4. Reputational damage: even if VAT errors are unintentional, tax non-compliance can tarnish a company’s reputation and jeopardise relationships with customers and business partners.

5. Audit risks: companies operating across borders face a higher risk of audits. Tax authorities are increasingly using AI to uncover discrepancies, with strict documentation requirements (eg transport proofs for zero-rated deliveries of goods).

6. Brexit complications: since the UK left the EU VAT area in 2021, trading between the EU and UK has become significantly more complex – EU-UK trade now involves import VAT and customs, increasing the risk of errors for unprepared businesses.

4. What is the EU doing to modernise VAT?

The EU is actively addressing VAT challenges through numerous reforms, the most notable being the VAT in the Digital Age (ViDA) package, which was adopted in March 2025. With this new raft of proposals, the EU is aiming to build a more efficient, fraud-resistant VAT system, designed for the digital era.

Key ViDA objectives:

• Close the VAT gap – by employing real-time digital reporting and mandatory e-invoicing, the EU aims to close a €40 billion VAT gap by 2030
• Cut compliance costs – the move to e-invoicing will help reduce VAT fraud by up to €11 billion a year and bring down administrative and compliance costs for EU traders by over €4.1 billion per year over the next 10 years. It ensures that, in time, existing national systems converge across the EU and paves the way for EU countries that wish to introduce national digital reporting systems for domestic trade
• Support the green transition and digital economy – paper-based invoicing and manual processes will be replaced by fully digitised systems that modernise VAT for digital trade

ViDA proposals include:

• Single VAT registration: this allows business to manage VAT obligations across the EU with one registration
• Domestic reverse-charge: to curb fraud, ViDA will introduce a domestic-reverse charge for all B2B transactions where the supplier is not resident in the Member State where the transaction takes place. The buyer, not the seller, will account for VAT on the transaction
• New place of supply rules: rules for determining the VAT location for platform-based and digital services are being updated. These will clarify taxation for services (eg short-term accommodation) and ensure VAT is paid where the service is consumed
• Mandatory e-invoicing (2028): structured digital invoices will replace paper, ensuring real-time data exchange and automated tax compliance
• Digital reporting (2028): ViDA will introduce real-time digital reporting to improve VAT oversight and reduce fraud. Continuous Transaction Controls (CTCs) for instant VAT reporting, are also on the cards

Other modernisation efforts include:

• One-Stop Shop (OSS)/Import One-Stop Shop (IOSS) expansion: implemented in July 2021, the IOSS is an EU-wide VAT simplification scheme that streamlines VAT collection on low-value goods imported into the EU. There are plans to expand OSS to include more services
• Small Business Scheme (2025): simplified VAT rules and exemptions have been implemented across multiple EU countries for businesses with a turnover below €100,000
• Payment service provider (PSP) oversight: since January 2024, PSPs have been mandated to collect and report data regarding cross-border e-commerce payments to ensure greater transparency

These reforms aim to digitise compliance, reduce fraud and align VAT with sustainability goals, though businesses will likely face short-term adaptation costs during the initial implementation phase.

5. What should businesses do now?

Here are seven practical steps businesses can take to successfully navigate the EU VAT environment and prepare for the ViDA transition:

1. Assess your obligations

• Determine your VAT registration needs based on sales volume, customer type (B2B/B2C), and transaction type (goods/services)
• Check whether the €10,000 B2C distance selling threshold or IOSS apply
• Non-EU businesses should evaluate fiscal representative requirements

2. Leverage technology to optimise VAT processes

• Use VAT compliance software to automate rate calculations, invoicing and filings
• Look into e-invoicing and digital reporting requirements now to meet 2028 mandates

3. Register for OSS/IOSS

• Use OSS for B2C intra-EU sales or IOSS for low-value imports to simplify compliance and avoid multiple registrations

4. Maintain robust records and stay informed

• Keep detailed invoices, transport documents and import records in accordance with the local statute of limitations to support audits and refund claims
• Use VIES – the EU VAT number validation system – to verify customer VAT numbers for B2B transactions
• Monitor national VAT rate changes and ViDA implementation through resources like the European Commission’s Taxation Portal or Fiscalis Programme, the EU tax cooperation and modernisation programme

5. Mitigate risk

• Conduct supply chain due diligence to minimise fraud exposure
• Ensure timely filings to avoid penalties and secure refunds
• Train staff on new rules, particularly if you operate across multiple jurisdictions

6. Prepare for ViDA implementation

• Assess readiness for single VAT registration and reverse-charge rules
• Budget for IT upgrades to comply with e-invoicing and digital reporting by 2028

7. Partner with an expert

• Consult VAT specialists or local tax advisors for complex supply chains, cross-border trade or non-EU operations
• Consider outsourcing compliance for high-risk markets (eg Italy, Spain, Romania, Poland)

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