EU member states to gain more freedom over VAT
The European commission will hand back powers to EU member states on VAT, in a long awaited shake-up of the rules that enabled chancellor George Osborne to declare the abolition of the tampon tax last month.
After years of wrangling over VAT rates on everything from bicycles to tampons, the commission proposed on Thursday a far-reaching overhaul of VAT rules that could lead to the minimum EU rate of 15% being scrapped.
The shake-up of the rules has been in the works for months, but the issue shot up the British political agenda, as the government came under mounting pressure to abolish VAT on sanitary products, the so-called tampon tax.
Pierre Moscovici, the European commissioner in charge of tax policy, said he was aware member states felt constrained by the existing rules. “We want to reform the rules relating to rates in order do away with unnecessary restrictions and to give back to member states a degree of freedom.”
Current rules mean value added tax must be set at a minimum rate of 15%, although there is a long list of exemptions and lower-rates, varying from one EU country to another. In the UK, goods exempt from VAT include most food and children’s clothes; other items are subject to a reduced rate of 5%, such as children’s car seats and, for now, sanitary products. But national governments have long chafed against the rules and called for more power to set exemptions without the say-so of Brussels.
Two options have been proposed by the commission. The first, less radical, option would preserve the 15% rate, with regular reviews of the list of exempt goods and services. A second option would scrap the 15% rate and abolish the list, allowing member states to determine VAT tax breaks, in line with EU criteria.
Moscovici said he preferred the second approach, describing it as “a more flexible option that is more in line with the modern economy”.
The EU’s 28 finance ministers will have the final say and must reach a unanimous agreement before the new rules can come into force.
At an EU summit dedicated to Europe’s migration crisis last month, David Cameron successfully lobbied EU leaders to sign up to a declaration that “welcomed the intention” of the commission to give member states more flexibility on VAT, including the possibility of a zero rating on sanitary products.
Despite some eye-rolling from officials at using an EU summit to get into the minutiae of VAT rates, leaders were ready to agree to the British’s prime minister’s wish, in order to avoid a political headache ahead of Britain’s EU referendum.
The UK is not alone in looking for more flexibility. The Netherlands has won a reduced rate for bicycles, Greece has looked for tax breaks on agricultural machinery, while Cyprus and Luxembourg have secured lower rates on hairdressing.
Last year, France and Luxembourg fought an unsuccessful battle in the European court to apply reduced VAT rates to e-books. But judges decided that only paper books qualified for a tax break under EU rules.
The EU action plan warned that devolving powers to member states could lead to “an erosion of VAT revenues” as individual sectors lobby for tax breaks. “In the long run, this might shrink the tax base, going against the EU’s economic policy recommendations.”
Business groups welcomed the proposals. “The European commission’s action plan on value added tax can give a much needed impetus to modernising the EU’s VAT system,” said Markus Beyrer, director-general of BusinessEurope, the pan-European employers association.