Select Committee on European Scrutiny Eleventh Report


COM(01) 599

Commission Report on VAT — Reduced rates.

Legal base:
Documents originated:22 October 2001
Forwarded to the Council: 23 October 2001
Deposited in Parliament: 13 November 2001
Department:HM Customs and Excise
Basis of consideration: EM of 23 November 2001
Previous Committee Report: None
To be discussed in Council: None planned
Committee's assessment:Politically important
Committee's decision:Cleared


  10.1  The framework for Value Added Tax (VAT) is set out in the Sixth VAT Directive. Under this Directive, Member States are required to apply to the supply of goods and services a standard VAT rate fixed as a percentage of the taxable amount. The standard rate of VAT that will be applicable to 31 December 2005 was fixed at 15% by the Directive 2001/4/EC. The Sixth VAT Directive also allows Member States to apply certain reduced rates, provided a number of conditions are satisfied. For example, reduced rates may be applied to certain categories of goods and services (as specified in Annex H of the Sixth VAT Directive) and should not be lower than 5%. Other conditions may apply in the case of natural gas, electricity and labour-intensive services. The Sixth VAT Directive also allows certain Member States, by way of exemptions granted during accession negotiations, to maintain reduced rates during a transition period. These exemptions concern either reduced rates lower than the 5% minimum (super­reduced rates), the maintenance of reduced rates for goods or services not covered by Annex H to the Sixth Directive or the application of a reduced rate no lower than 12% (the "parking" rate).

  10.2  Article 12(4) of the Sixth VAT Directive requires the Commission to produce a report on reduced VAT rates every two years in order for the Council to review the scope of the reduced rates and to decide whether or not any alterations are needed. The last report was produced in 1997.

The document

  10.3  The report describes and analyses recent developments in VAT rules and their application in Member States, including the standard and reduced rates, with a view to assessing their impact on the working of the Single Market. Its findings are based on information received from a variety of sources including businesses and trade associations.

  10.4  The report notes that VAT rates vary considerably across the Community, with standard rates ranging from 15% to 25% and reduced rates from 5% to 17%. The average standard rate in the EC is about 19.5% while the average reduced rate is just over 8%. Six Member States apply a reduced rate below the minium rate (super-reduced rate) and three Member States still apply a reduced rate that is no lower than 12% (the "parking" rate).[15] Five Member States grant exemptions with tax refunds (zero rate) on a marginal and restricted basis, while Ireland and the UK are alone in continuing to make extensive use of such zero rates. The report also covers transitional arrangements for Austria and Portugal in respect of VAT rates, noting that these have been extended.

  10.5  Unlike previous editions, the report contains no discussion of any special arrangements for particular goods or services, such as the tax treatment of works of art or agricultural products.

  10.6  The report states that the current optional nature of the reduced rates and the lack of common definitions of the categories on which reduced rates are allowed could be obstructing the smooth working of the internal market and distorting competition.

  10.7  The report notes some business concern about the application of reduced rates and looks at various sectors where reduced rates apply, or where representations have been made for reduced rates. The report acknowledges that such requests for reduced rates often come from businesses themselves.

  10.8  The report is not accompanied by any proposals for changing the present regime. However, the Commission does indicate that, as part of its EC VAT Strategy programme, it intends to carry out a more in­depth review of this area around the end of 2002. The report suggests that the review may consider the establishment of a structure based on two reduced rates applicable to individual lists of goods and services:

    —  a reduced rate near the current minimum of 5% on goods or services which are either basic necessities or fulfil a social objective; and

    —  a higher reduced rate for goods and services which for historical or economic reasons should be subject to a rate lower than the standard rate.

The Government's view

  10.9  The Government says that there are no policy implications for the UK, and the report acknowledges that any future proposals from the Commission in this area will be subject to the Council acting by unanimity.


  10.10  Although the document contains no legislative proposals, we have made a short report to the House because it contains useful information on VAT rates in different Member States and also records the Commission's intention to undertake a review of reduced VAT rates in 2002/3 as part of its VAT Strategy programme. We also note the Minister's comment that any future proposals from the Commission in this area will be subject to the Council acting by unanimity. We look forward to considering the conclusions of that review. Meanwhile, we are content to clear this document.

15  The parking rate is a transitional rate for goods and services moving from one category to another. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 17 January 2002