Reduced EU VAT Rates Good For UK, Advisor Says

by Robert Lee, Tax-News.com, London

19 November 2008

European Commission (EC) proposals to allow reduced value-added tax (VAT) rates for a wider range of services, could provide the United Kingdom government with an opportunity to boost the increasingly pressurised labour market, according to KPMG.

The EC has proposed extending their recent successful pilot scheme to allow all European Union member states to apply a reduced VAT rate of 5% to certain labour-intensive services, including the supply of restaurant and catering services, hairdressing, window cleaning, building repairs and maintenance.

A new law has been drafted and the European Council discussed the proposal on November 4, 2008. The Council has urged the working party responsible, which includes a UK representative, to agree wording so that it can approve the law by the end of 2008. The UK would then have the option of introducing new reduced VAT rates for a range of services.

With current UK VAT rates at 17.5%, labour intensive businesses would benefit from an immediate 12.5% boost to their bottom line, says KPMG. A reduction could particularly benefit the restaurant and catering sector, who are already struggling with increased food price rises and reduced demand, the firm noted.

Amanda Tickel, Tax Partner at KPMG commented: “Once approved, these changes present a targeted opportunity for the government to support those working in the labour-intensive services outlined. These proposals are backed by the European Commission and other member states, so it is within the UK’s power to help drive them through."

She added: “Labour intensive businesses looking to cut costs, would achieve the equivalent of a 12.5% cost reduction, if these reduced rates are adopted. These changes could make the difference between a businesses survival or failure as the downturn bites.”

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