VAT and the circular economy. What changes is the EU planning and what do they mean for businesses?

VAT was designed primarily as a neutral consumption tax. In practice, however, its design can influence the economic attractiveness of certain behaviours : repairing instead of replacing a product, reselling instead of purchasing new goods, donating surpluses for further use instead of destroying them, or choosing a less emission-intensive means of transport.

The European Commission wants to verify whether the current rules create barriers to circular models and whether they can be better coordinated with environmental objectives without overcomplicating the VAT system. The initiative is linked to the upcoming Circular Economy Act and fits into the broader direction of ESG regulations and sustainable development.

"Changing VAT rules in a circular economy could have far-reaching consequences beyond the tax rate itself. For businesses, changes to the VAT procedure will be crucial, including the margin on used goods sales, the way unsold inventory is managed, and the cost of vehicle fleets. Therefore, it's worth determining now which processes and data will be most sensitive to the future reform." - Szymon Lipiński, Senior Tax Consultant, Crowe Poland.

1. Used goods and second-hand models

The first area of consultation is the taxation of used goods. This topic is relevant not only to the traditional second-hand trade but also to e-commerce, electronics, automotive, industrial equipment, marketplace platforms , and companies developing product buyback, refurbishment, and resale programs.

The EU VAT system currently provides for a special margin scheme for certain transactions, including those involving used goods. In simple terms, this scheme allows for the seller's margin to be taxed instead of the entire sales price, provided the conditions set out in the VAT Directive are met. The reform could provide an opportunity to assess whether the current rules are responsive to the development of modern reuse and resale models.

At this stage, the Commission has not determined whether the changes will involve expanding preferences, simplifying the procedure, changing its terms, or using other instruments. However, companies trading in used goods should monitor the work particularly closely, as even a technical change to the method of determining the tax base could impact product margins and the configuration of sales systems.

2. Destruction of full-value goods

The second area identified by the Commission concerns the destruction of goods that are still usable. From a circular economy perspective, the problem arises when tax consequences make destroying surplus inventory more beneficial or less expensive for businesses than donating, reusing, or otherwise disposing of it.

Current EU regulations provide specific consequences, for example, for the free transfer of assets from which VAT has previously been deducted. At the same time, the VAT Directive separately regulates deduction adjustments in the event of destruction, loss, or theft of properly documented goods. Such differences can be analysed to ensure that the system does not create unintended incentives that counteract the reuse of resources.

The potential impact of the reform is broad. It applies to businesses with surplus inventory, end-of-line items, consumer returns, short-life products, packaging, spare parts, and refurbished equipment. In practice, the consequences could extend to the retail, fashion, FMCG, electronics, automotive, and manufacturers and distributors sectors, among others.

3. Deduction of VAT on passenger cars used for business purposes

The third area of consultation concerns the rules for deducting VAT on passenger cars used by businesses. The Commission is examining these as part of a broader initiative on the low-carbon economy. One question, therefore, is whether the VAT system can better support the choice of lower-emission vehicles.

At this stage, it is unclear whether the future project will aim to further harmonize deduction rules, simplify them, differentiate them based on vehicle environmental parameters, or adopt other solutions. From the perspective of companies, this could be significant for the total cost of ownership of fleets, leasing, rentals, vehicle purchases, and employee mobility policies.

At this stage, there is no agreed-upon draft legislation. However, the work may include assessing various options regarding the margin procedure for used goods, VAT rules for the destruction and transfer of full-value goods, and the scope of VAT deductions for passenger cars. Only an impact assessment will determine which solutions will be included in the legislative proposal.

For businesses, the most important thing will be to determine which processes may be affected by future changes. Depending on the business model, the reform may impact prices and margins, the management of surpluses, the accounting for the sale of used goods, or the total cost of fleet operation. For businesses operating cross-border, the analysis should also consider VAT risks in international trade, as changes to the sales model or flow of goods may simultaneously impact several tax obligations:

• retail and e-commerce – changes in the economics of selling used goods, returns and refurbished products;
• manufacturers and distributors – potentially new rules regarding surplus, unsold stock and withdrawn products;
• companies running product repurchase, renewal and resale programs (buy-back, refurbishment, recommerce) – simplifications or modifications to the VAT settlement method;
• entrepreneurs with car fleets – impact on the scope of VAT deduction and calculation of vehicle costs;
• ESG, tax, accounting and supply chain departments – the need to combine environmental and operational data with VAT settlement rules.

It is necessary to establish which processes use the margin procedure, where VAT is due on free transfers, how the destruction of goods is documented and in what situations the deduction is adjusted.

It is worth identifying used, refurbished and returned goods sales, repair processes, buy-back programs, donations, inventory liquidation and other ways of managing surpluses.

Future changes may require data that the tax department does not have on its own – e.g. the reason for the product recall, its further purpose, quality status, method of refurbishment or vehicle parameters.

If the tax treatment of used goods or inventory flows changes, companies may need new transaction tags, tax rules, product data, or changes to system integrations.

Interested entities can submit their views to the Commission by 4 November 2026. It is also worthwhile to prepare financial scenarios for the processes most sensitive to changes in VAT rules.

When planning changes in systems, it is also worth taking into account changes in JPK reporting, so that tax and financial modifications are designed consistently and not in isolation from other reporting obligations.

At this stage, it is especially easy to misinterpret. The mere launch of consultations does not mean the European Union will introduce a uniform, reduced VAT rate for used products, exempt all donations from VAT, or change the VAT deduction for electric cars. Such solutions may appear in the debate as variants, but they are not currently binding or agreed upon law.

The right approach for management boards and financial directors is therefore not to immediately rebuild processes, but to identify exposures, calculate the scale of transactions and prepare data that will enable a quick assessment of the project when the Commission presents specific regulations.

The public consultation will run until 4 November 2026. The Commission announces that the parallel regulatory evaluation and impact analysis are expected to be completed in early 2027. Only then will the results be used to prepare a legislative proposal amending the VAT Directive. The proposal will then have to go through the EU legislative process.

This means that businesses should not change their settlement methods based solely on consultation announcements. Instead, they should treat the initiative as a signal that the areas of second-hand goods, the management of full-value surpluses, and vehicle fleets could become one of the next directions of European VAT reform.

VAT changes increasingly extend beyond accounting and impact business processes, logistics, ERP systems, and investment decisions. Crowe supports businesses with ongoing VAT settlements and compliance, as well as with analysis of the impact of new regulations, transaction mapping, and settlement reviews. Depending on the business model, support may also include VAT registration in Poland and adapting settlement obligations to the specifics of domestic and cross-border operations.

Want to ensure your VAT processes are prepared for the upcoming changes? Take advantage of Crowe's VAT support. We help with VAT recordkeeping, preparing and submitting SAF-T files, EU VAT settlements, settlement accuracy reviews, and ongoing tax advice.