European Commission launches public consultation on VAT and the circular economy

October 14, 2026 EU VAT Update

The European Commission has launched a public consultation to gather stakeholder views on how the EU VAT framework can be better aligned with the objectives of a circular and low-emission economy.

The consultation focuses on identifying improvements to the VAT system that would facilitate the development of circular business models and remove tax-related barriers to sustainable economic activities. Stakeholders are invited to provide input on three key areas:

  • The VAT treatment of second-hand goods;
  • The VAT implications of the destruction of viable goods;
  • VAT deduction rules applicable to passenger cars used for business purposes.

The outcome of this process will contribute to the development of a legislative proposal to amend the EU VAT Directive, ensuring that VAT rules more effectively support circular economy objectives and the transition to a low-emission future.

The consultation is open for an eight-week period through the European Commission’s “Have Your Say“ portal. Businesses, industry associations, SMEs, tax professionals, academics, national tax authorities, sustainability organisations, and other interested parties are encouraged to participate and share their perspectives.

This initiative represents an important step towards creating a more coherent and future-oriented VAT framework, capable of supporting resource efficiency, waste reduction, and sustainable economic growth across the European Union.

Stakeholders wishing to contribute should submit their comments by 4 November 2026.

For SMEs, the consultation itself does not create any immediate changes. However, if the resulting VAT reforms are adopted, they could have several practical implications.

Potential benefits for SMEs

  • SMEs involved could benefit from simplified VAT rules.
  • Reduced VAT distortions may make second-hand products more competitive compared with new goods.
  • This could create new opportunities for businesses operating circular business models.
  • Lower compliance burdens and clearer VAT rules may encourage growth in these sectors.

Potential challenges

  1. Compliance and system updates
  • Any amendment to the VAT Directive could require SMEs to update accounting systems, ERP software, invoicing processes, and internal controls.
  • There may be short-term implementation costs.
  1. Changes to passenger car VAT deduction rules
  • SMEs that use passenger cars for business purposes could be directly affected depending on the direction of the reform.
  • The impact could be positive if deduction rights are expanded, but some businesses may face restrictions if anti-abuse measures are introduced.

Overall assessment

The initiative appears broadly positive for SMEs, particularly those active in the circular economy, including retailers of second-hand goods, repair businesses…The Commission’s objective is to remove VAT obstacles that currently discourage circular business models, which could ultimately reduce administrative burdens and improve competitiveness for many SMEs. However, the precise impact will depend on the legislative proposal expected following the consultation and impact assessment process, currently scheduled to conclude in early 2027.

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