EC threatens to abolish zero VAT regime


Comment: If you had a choice between implementing a zero VAT rate on children's clothes and shoes or offering a lower VAT rate on dining out in restaurants, which would you support? Logic would tell you that the former is much more important, but if the European Commission has its way, it could well be the other way around.

At a time when the commission is supporting the abolition of the UK and Ireland's position of zero VAT on children's clothes and shoes, it is also considering supporting a derogation of the VAT rate for restaurant bills in France.

For the many people with children who are trying to make ends meet daily, this will be a slap in the face.

This problematic situation has arisen due to the VAT derogation system in place in Europe. Let me explain how the VAT derogation system works.

Under the sixth VAT directive, the council, acting unanimously on a proposal from the commission, can allow any member state to introduce derogation measures from this same directive. If a member state asks to change the VAT treatment of a particular good or service in that state and this is approved by all other member states, the derogation is granted.

The derogation list is currently (March 2005) composed of 140 derogations, which the commission anticipates will grow with new requests received from the ten new accession countries. In July 2003 the commission adopted a draft directive on this list of goods and services for which reduced VAT rates could be applied, aiming to streamline derogations on goods and services not included on the list.

VAT derogations can be a sensitive issue and some are easier to obtain than others. Take France for example. President Jacques Chirac promised during his electoral campaign to slash VAT rates for French restaurants by 2006.

The French government succeeded in persuading the commission to include restaurant meals in the derogation list in the draft directive. When the 'big three' (UK, France and Germany) met in February 2004, the UK agreed to President Chirac's proposal to cut VAT on restaurant meals from the standard rate of 19.6 per cent to 5.5 per cent.

In May 2005, the Luxembourg presidency agreed to accept the French request and, in an effort to make the cut more palatable, has given other member states until January 1st, 2006, to submit requests on the listed services. However, following the meeting of EU tax experts on May 12th, the commission compromise proposal was rejected.

Other member states requested that other items be added to Annex H of the sixth VAT directive (which lists all reduced-rate items) and so no changes were recommended. The matter was discussed again recently during the EU's finance ministers' meeting on June 7th, but it is clear that negotiating what will stay on and off the list will be contentious.

It is accepted that one of the main reasons EU member states apply reduced VAT rates is to avoid penalising the poor, who spend a higher proportion of their income on consumption than wealthier people. It seems to me that if we accept this to be the main motivation in making changes to the VAT treatment of a particular good or service, then it makes little sense for the commission to support the abolition of the UK and Ireland's zero VAT on children's clothes and shoes, and on the other hand support cuts in restaurant bills in France.

It is claimed that cutting VAT on restaurant bills would increase employment in the restaurant sector and benefit consumers. Commissioner Kovacs, however, has expressed doubts as to whether VAT reduction really results in lower prices for consumers over the long term. In fact, he claims that the commission has carried out an experiment which concludes that using VAT rates to achieve other policy objectives other than social ones rarely fulfil the objectives.

For the commission to support the abolition of a zero rate of VAT on children's clothes and shoes while at the same time supporting a huge reduction in French restaurant VAT is contradictory to say the least, a contradiction which I hope will be apparent to all member states when it comes to the final decision-making on this issue.

Gay Mitchell is Fine Gael MEP for Dublin