The European Commission has put forward a controversial plan to simplify the diverse system of reduced rates of sales tax applied throughout Europe.
Tax commissioner Laszlo Kovacs said yesterday he wanted to put in place a new simplified system for collecting VAT from 2010. It would replace a patchwork of permanent and temporary derogations for reduced VAT rates that cover everything from children's shoes in Ireland to hairdressing in Holland.
"From an economic perspective, a single uniform VAT rate (per member state) is the best policy choice," said Mr Kovacs, who acknowledged that there was some benefit to applying reduced rates of VAT to certain locally supplied services.
A single sales tax rate would avoid distortions in the internal market and prevent EU states from using VAT as a means of attracting certain types of businesses, according to the commission.
A study by research group Copenhagen Economics singled out Ireland as a state with a complex VAT system. It notes that Ireland has a three-tier VAT system with standard (21.5 per cent), reduced (13.5 per cent) and zero rates. Food alone has 89 subgroups in which, for instance, nuts are zero rated while roasted nuts are standard rated and cold pizza is zero rated while warm pizza is reduced rated in a take-away.
The study's most controversial finding is that derogations available to Ireland and Britain to apply zero rates of VAT for babies' nappies and children's shoes are not the best option to support low income families. The consultants argue that a more sensible option would be to tax nappies at the standard rate of VAT but make direct transfers of cash to families in need.
