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EC proposal would allow more flexibility to use reduced VAT rates

Analysis

The European Commission has proposed changes to the VAT directive that would allow more flexibility to use reduced VAT rates for certain services, Tax and Customs Commissioner László Kovács said at a press conference in Brussels on Monday.

The proposal covers such areas that ensure the use of reduced VAT rates will not adversely affect the workings of the EU market. The majority of the affected services are labor intensive or local. They include restaurant services. The proposal does not change the basic principle that member states may choose to use the reduced VAT rates, but are not obligated too.

In the absence of clear orientation from the Council to the Commission’s communication in July 2007 regarding the full revision of the system of reduced rates, the proposal only seeks to deal with issues which require urgent action while, at the same time, seeking to provide the same possibilities to all member states, the Commission said in a statement. The scope of the proposal is therefore limited and most of the services in question are already eligible for a reduced rate but only in a limited number of member states and only for a limited period running until 2010.

The proposal does not include a general review of the derogations granted to member states, nor is it widening the scope of reduced rates for environmental or energy saving purposes. The proposal would broaden the definition of housing sector services eligible for reduced VAT to include home building, renovation, maintenance and cleaning, rather than just services linked to a social policy. It would make restaurant and catering services eligible for reduced VAT, and it would permanently include labor-intensive services, such as bicycle repair, cleaning, personal care, gardening and in-home care services on the list of eligible services.

The proposal would also widen the definition of books, which may have reduced VAT rates, to include audio-books. Under the EU’s VAT rules, goods and services subject to VAT are normally subject to a rate of at least 15pc. Member states may apply reduced rates of not less than 5% to goods and services set out in a restricted list. However, these simple rules are complicated by a multitude of derogations granted to certain member states. For example, 11 member states currently apply a reduced rate to restaurant services while the 16 remaining member states cannot. A similar situation of derogations exists for labor intensive services. (MTI-Econews)

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