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16 July 2007
Categories: News , VAT
EU Commission looking on the reduced VAT rates in the EU

Zero rate under fire?

The European Commission has its eye on the reduced VAT rates in the EU. With regard to the UK, this means the zero rate applying to, for example, children's clothes, certain food, and books.
In a recent press release, the European Commission says that 'there is a real need for a simplification and rationalisation of the current VAT rates structure, in particular the reduced VAT rates'. It wants 'more flexibility which would allow Member States to apply VAT reduced rates to local supplies. However, this flexibility needs to be balanced to ensure the proper functioning of the Internal Market and to avoid disproportionate compliance costs for business'. Thus the Commission has made some suggestions, but has not made any concrete proposal for new categories of products or services, 'given the need for prior political consideration by Member States'. Furthermore, it proposes to extend, until the end of 2010, most of the derogations coming to an end soon.
Recognising that the reduced rate is a 'sensitive area', László Kovács, the Commissioner for Taxation and Customs Union says that 'a new framework for reduced rates is needed, more rational, more transparent and more flexible for the Member States'.
The Commission has produced a communication based on an economic study conducted by an independent think-tank. The main conclusion of this study is that from an economic perspective a single uniform VAT rate (per Member State) is the best policy choice. It would slightly improve consumer welfare in comparison with the current situation, reduce distortions in the functioning of the Internal Market, simplify the rules and thus reduce compliance costs for business.
However, the document suggests that there may be specific economic benefits from operating a reduced rate in carefully targeted sectors. According to the study, lower VAT rates could contribute to economic growth if they can induce consumers to spend more on bought-in goods and services. Such a change in consumption habits often also allows more time to be spent on leisure activities with an associated increase in expenditure. There are also arguments for introducing VAT reduced rates in sectors employing many low skilled workers in order to create new jobs. However, overall net gains seem to be minor.
The study also stresses that other economic instruments, such as subsidies, might often be more efficient than reduced VAT rates to achieve environmental, social, cultural and economical policies.
Unsurprisingly, the sections of the national press that have seen this press release are not very happy about it. A Treasury spokesperson said:

'The UK's zero rates are worth over £28 billion to UK households each year. They are fully safeguarded under existing European agreements. We will not agree to proposals that would harm our social objectives or undermine the fairness of the UK VAT system.
'In fact, we will be making the case in Europe for the introduction of a new reduced VAT rate on energy-efficient products and energy-saving materials, as part of our climate change agenda.'
European Commission press release IP/07/1017, 5 July 2007

Categories: News , VAT
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