VAT rates on labour-inensive goods can be cut by EU states

EU STATES can apply reduced rates of VAT for labour-intensive services such as house repairs, restaurants and hairdressing following a decision yesterday by finance ministers.

The agreement follows a decade of wrangling between states such as France that want to cut sales tax on politically sensitive sectors such as restaurants and those such as Germany, which believe cutting VAT narrows the tax base and can hurt public finances.

“The result is that the restaurant sector can benefit from reduced VAT, according to the wish of each state,” said French finance minister Christine Lagarde, who has lobbied tirelessly at EU level in recent months to overcome stiff opposition to the measure.

The EU has a patchwork of reduced rates of VAT on local services but not all countries can levy reduced rates on the same products. The standard rate of VAT is 15 per cent and states will have the right to cut this to 5 per cent on an agreed list of services. Under a temporary derogation offered to some states, reduced VATs were due to expire in 2010, a position that would have caused price hikes for consumers.

Any decision on tax changes at EU level requires the unanimous backing of all 27 member states and, before the EU meeting, German finance minister Peer Steinbrueck said he didn’t see an advantage to reduced VAT rates but he would “try to be helpful”.

Germany later agreed to back permanent reductions in VAT rates for labour-intensive services in return for French support to block any new proposals for further VAT reductions. This Franco-German agreement is likely to block British prime minister Gordon Brown’s proposal for reduced rates of VAT for energy-efficient goods. He recently tabled this proposal as a key measure to help tackle climate change.

A spokesman for Minister for Finance Brian Lenihan said the deal should have little effect on Ireland as it already applied reduced VAT rates in labour-intensive services.