Select Committee on Environmental Audit Minutes of Evidence

Further memorandum from HM Treasury


  I am sorry you have not had an earlier reply to your letter of 11 October concerning:

    —  the Government's view of the scope of the new French reduced rate and its legality under European law;

    —  how the UK intends to respond; and

    —  whether the French change has any implications for the UK.

  The French have introduced their reduced rate under a European Commission proposal for an optional, experimental reduced VAT rate. This would allow Member States to apply a reduced rate of VAT to some labour intensive services, not to materials in isolation. The services concerned must satisfy the following requirements:

    —  they must be labour intensive;

    —  they must be largely provided direct to final consumers;

    —  they must be mainly local and not likely to create distortions of competition;

    —  there must be a close link between the lower prices resulting from the rate reduction and the foreseeable increase in demand and employment; and

    —  the application of a reduced rate must not prejudice the smooth functioning of the internal market.

  Those Member States who wish to take part must apply to the Council for approval. The experiment is planned to run between 1 January 2000 and 31 December 2002. The aim is to boost employment and create jobs by stimulating demand for certain services through lower consumer prices.

  Member States have agreed that the reduced rate should apply only to a limited range of services, not materials in isolation. One of these is the "renovation and repair" of private dwellings. The new French reduced rate for renovation and repair appears consistent with the scope of the experimental reduced rate, although this is for the Commission and the Council to decide. The French have not introduced a reduced rate for DIY goods, since the reduced rate may only be applied to services.

  France brought in a reduced rate for renovation and repair to private dwellings as part of their Autumn Budget, not a reduced rate of VAT for DIY energy saving materials. (But the French reduced rate includes relief for the installation of energy saving materials, a relief the UK introduced last year.) The French say that they could not wait until January 2000 to start their reduced rate, as otherwise their building repair industry would be starved of work during any gap between the announcement and implementation of the reduced rate. They acted before there was EC agreement to the measure. The Commission and other Member States are, however, unlikely to take infraction proceedings against France, as France has acted along the lines of an existing proposal.

  The UK is not opposed to the introduction of an optional, experimental scheme if Member States feel it would be beneficial. To date, however, we have not expressed an interest in introducing reduced rates, believing that we can tackle unemployment more effectively by targeted schemes to equip the unemployed with skills for work such as those introduced in the last two Budgets.

November 1999

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