Memorandum from HM Treasury
VAT ON ENERGY SAVING MATERIALS
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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