6 Value Added Tax
| (26739)
11439/05
COM(05) 334
| Amended Draft Directive amending Directive 77/388/EEC as regards the place of supply of services
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| Legal base | Article 93 EC; consultation; unanimity
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| Document originated | 20 July 2005
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| Deposited in Parliament | 27 July 2005
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| Department | HM Treasury |
| Basis of consideration | EM of 30 September 2005
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Standing Committee B
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Background
6.1 In October 2002 the Commission published a Communication reviewing
the definition of "the place of supply of services"
for Value Added Tax (VAT) purposes. A Commission Communication
of October 2003 on wider VAT issues also covered this matter.
In December 2003 the Commission proposed a draft Directive to
amend the Sixth VAT Directive, 77/388/EEC, in relation to the
rules determining the place of taxation for supplies of services
made by one business to another. Presently most supplies of services
are treated as made where the supplier is established. For the
future they would as far as possible have been taxed where they
were consumed. They would have been treated as made where the
customer was established, with exceptions for certain services.
Our predecessors cleared the document in February 2004.[17]
Agreement has not been reached on this draft Directive.
The document
6.2 In this present document the Commission present an amended
draft Directive. In relation to the place of taxation for supplies
of services made by one business to another this document is almost
identical to the earlier draft. We understand that although some
progress has been made by the Irish and Dutch Presidencies on
this issue the Council has still to make changes reflecting this
progress.
6.3 But more importantly the amended draft Directive
would also apply to supplies of certain services to private consumers,
including certain non-business organisations. The effect would
be that:
- distance teaching, telecommunications,
broadcasting, electronic services and long term hiring of vehicles
would be taxed at the rate applicable where the consumer resides;
- certain services for immediate consumption —
restaurants and short term hiring of vehicles — would be
taxed at the rate applicable where the service is carried out;
and
- catering on board ships, aircraft and trains
would be taxed as made in the country of departure.
The Government's view
6.4 The Paymaster General (Dawn Primarolo) says that
it is widely accepted that in some areas the current VAT rules
relating to the place of supply of business to consumer are outdated
and can lead to distortion of competition. She argues that VAT
is a tax on consumption and that there is an underlying principle
that supplies should be taxed where they are consumed. She notes
that in the case of service sectors where suppliers are able to
make supplies from a distance those suppliers can establish themselves
in a low tax Member State and apply a VAT rate to all their sales
to private consumers in the Community. The Minister continues
that the current rules provide an incentive for businesses to
relocate to Member States with a low rate of VAT and that this
incentive will increase as it becomes easier to make supplies
from a distance: the proposed changes in the rules would protect
the Government's VAT revenues from the telecommunications and
electronic services sectors which are respectively in the region
of £3.2 billion and £450 million. She says there would
be also be a revenue gain from third country suppliers in those
sectors which have established in a low tax Member State and would
be paying UK VAT for the first time.
6.5 The Regulatory Impact Assessment the Minister
attaches to her Explanatory Memorandum supports these arguments.
Conclusion
6.6 We recognise the case Minister makes in support
of this proposal to change the place of supply of certain services
for private consumers. The proposal might protect Government revenues
and might limit the competitive threat to UK businesses or the
incentive for them to relocate to low tax Member States. However,
UK consumers would no longer be able to benefit from cheaper sources
of supply, being forced to pay a higher rate of tax. It could
be argued that in effect they would be deprived of the advantage
that arises from the single market. So we think the House would
wish the opportunity to examine this proposal further from the
point of view of the consumer and to that end recommend that the
draft Directive be debated in European Standing Committee B.
17 See (25221) 5051/04: HC 42-ix (2003-04), para 19
(2 February 2004) and HC-xviii (2003-04), para 4 (28 April 2004)
and also Stg Co Deb, European Standing Committee B, 10
March 2004, cols. 3-22. Back
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