EU Council Adopts Reduced VAT Directive

by Ulrika Lomas, Tax-News.com, Brussels

07 May 2009

The European Council has adopted a directive allowing, on a permanent basis, the optional use of reduced rates of value-added tax for certain labour-intensive local services, including restaurant services, for which there is no risk of “unfair competition” between service providers in different member states.

The announcement was made after the regular monthly meeting of the European Council of Finance Ministers on May 5 and follows a political agreement reached at the Council's meeting on March 10.

The optional use of reduced VAT rates in certain sectors is one of the actions identified by the economic recovery plan approved by the European Council in December.

However, the proposal has been divisive and some member states have been strongly opposed to the idea of effectively opening up ‘tax competition’ in the supply of certain services, notably Germany. Austria and Denmark have also been opposed to the Commission's plan, while the Bulgarian government warned last November that the reduced VAT plan would not result in lower retail prices for consumers and would merely distort the free market.

EU rules on VAT rates, set by directive 2006/112/EC, require member states to apply a minimum 15% standard rate to most goods and services. Member states are however allowed to apply one or two reduced VAT rates to a limited number of supplies. Where a reduced rate is allowed, this must amount to at least 5% of the value of the supply.

The current rules are the outcome of a variety of initiatives over the years, including the 1992 decision on the harmonisation of VAT rates in the context of the EU single market, a 2000 decision to allow reduced VAT rates on labour-intensive local services with a view to stimulating employment, and derogations allowed in 2004 for newly acceding member states.

Reduced rates on labour-intensive local services have so far only been allowed on a temporary basis.

Under the directive adopted on May 5, member states are permitted to apply reduced VAT rates, on a permanent basis, to the following labour-intensive local services:

• minor repairs of bicycles, shoes and leather goods, clothing and household linen (including mending and alteration);
• window cleaning and cleaning in private households;
• domestic care services such as home help and care of the young, elderly, sick or disabled;
• hairdressing; and
• the renovation and repair of private dwellings, excluding materials which account for a significant part of the value of the service supplied;

Member states can also apply reduced VAT rates on restaurant and catering services, and books on all physical means of support.

The agreement also allows: Portugal to apply a reduced VAT rate to tolls on bridges in the Lisbon area; Cyprus to apply a reduced VAT rate to the supply of liquid petroleum gas in cylinders; and Malta to maintain a zero VAT rate for the supply of foodstuffs and pharmaceuticals.

The directive will enter into force on the first day of the month following its publication in the Official Journal.

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