ES2.2 Possible solutions to the problems identified

Introducing an option to impose VAT on financial services transacted between members of the same group. This would eliminate the possibility of non-deductible input VAT within groups that perform exclusively (or almost exclusively) taxed supplies. This non-deductible input VAT currently arises in situations involving, for example, holding or group financing companies whose sole activity comprises the provision of exempt supplies to other members of the same group;

Introducing a reverse charging mechanism in combination with the option referred to in point 1. above so that no VAT effectively has to be charged on, for example, interest payable. Under Article 395 VAT Directive, this will require authorisation by the Council.

A more precise description of the forms of asset exploitation that should be regarded as constituting an economic activity. There is an overlap between genuine economic exploitation and the activities of a service provider. In only a few specific situations is extension of the definition of entrepreneurship regarded as desirable;

Parties actively participating – as a shareholder, for example – in an entity of which they are the owner or part-owner should be regarded as entrepreneurs. This will eliminate the peculiar situation where, for instance, holding or interim holding companies within a group are not regarded as entrepreneurs, even though they are anything but end consumers;

The right of intervening shareholders to deduct input VAT should generally be arranged in a way that eliminates the distinction between the acquiring, holding and disposing of the enterprise (i.e. its assets and liabilities) and the acquiring, holding and disposing of an interest in the entity that operates the enterprise;

Parties that acquire receivables on a commercial basis should always be regarded as an entrepreneur, with transfers of receivables to such persons being treated as if they constituted the transfer of a totality of goods or services;

Replacement of Article 12(1) VAT Directive by provisions that are more appropriate for small enterprises. This would eliminate the anomaly that an incidental, large-scale economic activity does not result in classification as an entrepreneur, whereas a more permanent economic activity on a more limited scale does result in such classification;

Disposals of receivables, shareholdings (equities) and bonds, for example, should be excluded from the definition of a service, unless the party transferring the securities is a securities trader. If the service is no longer exempt, costs can no longer be attributed to the disposal. This recommendation is linked to the recommendation in point 3 above;

Amendment of Article 15(2)(c) VAT Act 1968, such that the customer’s place of residence no longer determines whether input VAT is deductible. Instead, the place where exempt financial services are actually used or exploited should be the decisive factor;

Amendment of Article 174(2)(b) and (c) VAT Directive to include provision for income from financial transactions to be excluded from the calculation of the deductible proportion if it represents only a very limited share of supplies purchased and the costs are included in general expenses.