EC Allows Reduced VAT Rates On Some Services Until End Of 2010

by Ulrika Lomas, Tax-News.com, Brussels

27 July 2006

The European Commission has announced a proposal to allow seventeen member states to continue to apply reduced rates of value added tax on certain labour-intensive services until the end of 2010.

Under an EC directive, the application of a reduced VAT rate to certain specified labour-intensive services, such as renovation of private dwellings, hairdressing, window-cleaning, domestic cares and small repairs, will be allowed in principle as per an agreement reached by the European Council of Finance Ministers (Ecofin) last February.

The objective of the present proposal for a decision is to authorise Member States to apply these reduced rates from 1 January 2006 until 31 December 2010.

The EC will allow member states that have already applied reduced rates under an earlier directive to continue to do so. These countries include Belgium, France, Italy, Luxemburg, the Netherlands, Portugal, Spain and the United Kingdom.

Meanwhile, member states wishing to apply a reduced rate for the first time to some labour intensive services, or wanting to modify their previous authorisation are also being permitted to do so by the EC. These include Cyprus, the Czech Republic, Finland, Hungary, Malta, Latvia, Poland and Slovenia. Greece has requested for an extension of the scope of its previous request.

The lower VAT rates on labour-intensive services have been a source of much friction between member states, particularly between the new and old EU members. In January, Cyprus, the Czech Republic and Poland angered their fellow EU members by refusing to accept a compromise on extending reduced VAT rates, which expired at the end of 2005.

The Commission had threatened to take legal action against countries still imposing the lower rate, if an agreement could be not reached.

However, a deal supported by the majority of EU members in January meant that reduced rates would be extended until 2010, albeit on the same services as before, much to France's disappointment.

French President, Jacques Chirac had pledged, pre-election, that he would reduce VAT levels on restaurant dining, but a group of countries, led by Germany, opposed the granting of reduced VAT rates in other areas.

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