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EU VAT review could end Britain’s exemption on food, medicine and children’s clothing

January 28, 2016

The European Union executive plans a review of value added tax (VAT) across the bloc that might call into question Britain’s right to waive the sales duty on food, medicines and children’s clothing, a senior EU official said.

The comment by Economics Commissioner Pierre Moscovici could fuel controversy as Prime Minister David Cameron prepares to call a referendum on Britain’s continued membership of the bloc.

Briefing reporters on a European Commission plan to present measures this spring to overhaul the EU’s common VAT system, former French finance minister Moscovici said it would consider whether to scrap the British “zero rate” on some items, a legacy predating the current EU minimum VAT of 5 per cent. 

“We will have to reassess everything,” Moscovici said when asked if the VAT reform plans included ending states’ ability to set the tax at zero. He stressed that no decision had been made but added: “Zero rate is not the best idea.”

Britain, with neighbouring Ireland, is unusual in the extent to which it waives VAT. It would have a veto on any proposal to do away with historic exceptions to the 5 per cent minimum introduced in the 1990s.

A new argument with Brussels over tax could add to pressure on Cameron from Eurosceptics in his Conservative party who want to quit the EU. Three months ago, anti-EU campaigners seized on the government’s inability to waive VAT on tampons due to EU rules to call for “Brexit” in the referendum that could come as early as June.

However, several states have pressed the Commission to review the VAT system, partly due to technological developments.

Last year, EU judges ruled that e-books could not benefit from lower VAT charged on paper equivalents because they were not enshrined in a law drawn up before they were invented.

EU states must levy VAT of at least 15 per cent, but can go as low as 5 per cent on items on the EU “reduced rate” list.

Moscovici said the EU could draw up a new list or states could be allowed to draft their own, in a move that would give them more leeway in choosing goods benefiting from a lower tax rate. British officials had no immediate comment on Moscovici’s remark. Cameron will be in Brussels on Friday for talks with Commission President Jean-Claude Juncker, three weeks before an EU summit where he hopes to strike a deal on EU reforms before calling the referendum.