12 Value added taxation
| (a)
(26118)
14248/04
COM(04) 728
(b)
(26583)
9125/05
—
|
Draft Directive amending Directive 77/388/EEC with a view to simplifying value added tax obligations
Draft Directive laying down detailed rules for the refund of value added tax, provided for in Directive 77/388/EEC, to enable taxable persons not established in the territory of the country but established in another Member State
Draft Regulation amending Regulation (EC) No 1798/2003 as regards the introduction of administrative cooperation arrangements in the context of the one-stop scheme and the refund procedure for value added tax
Draft Directive amending Directive 77/388/EEC as regards reduced rates of Value Added Tax
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| Legal base | Article 93 EC; consultation; unanimity
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| Basis of consideration | Minister's letters of 28 September 2005
|
| Previous Committee Reports | (a) HC 38-ii (2004-05), para 5 (8 December 2004)
(b) HC 34-i (2005-06), para 25 (4 July 2005)
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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 | Not cleared; further information requested
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Background
Simplifying value added taxation
12.1 In 2003 the Commission published a Communication[22]
with a programme for improving the operation of the value added
tax (VAT) system within the context of the internal market. The
three legislative proposals in document (a) were presented by
the Commission in October 2004 as a package dealing with simplification
of VAT on cross border supplies under that programme. They are:
- a draft Directive to amend the rules to introduce a one-stop
scheme for VAT - a technologically-based compliance framework
which would allow businesses trading across borders to deal predominantly
with a single tax authority;
- a draft Directive to provide detailed rules for
the refund procedure for businesses established in one Member
State, where VAT is incurred by them in another Member State;
and
- a draft Regulation to amend administrative cooperation
arrangements to support the one-stop scheme and refund procedure.
12.2 Our predecessors considered these proposals
in December 2004 and, whilst commenting that they were a potentially
useful package of measures, asked to see the outcome of the department's
consultations before considering the matter further.[23]
Reduced rates of VAT
12.3 Under the Sixth VAT Directive (77/388/EEC) Member
States have been required since 1993 to set a normal rate of VAT
of at least 15%. At present there are three categories of allowable
reduced rates of VAT:
- up to two reduced rates of
at least 5% for a range of goods and services listed in Annex
H to the Sixth VAT Directive;
- experimentally, reduced rates for a small range
of labour-intensive services listed in Annex K to the Sixth VAT
Directive;[24] and
- transitional derogations allowing Member States
to retain zero rates or rates below 5% for specified goods and
services or for particular regions or islands.
12.4 In July 2003 the Commission proposed a Directive
to rationalise the system of reduced rates of VAT. The Commission
proposed amending the Sixth VAT Directive so that:
- Member States would be allowed
to apply a VAT rate below the standard rate only to goods and
services included in the Annex H list;
- the provisions allowing Member States to retain
their derogations would be abolished. Annex H would be expanded
to provide coverage for all Member States for those goods and
services currently give relief under derogation or under the labour-intensive
services experiment; and
- those Member States currently taxing goods and
services on the Annex H list at rates below 5 per cent would be
allowed to continue doing so.
12.5 The proposed new Annex H list included a number
of new items, such as restaurant services, gas and electricity
services, cut flowers and house repairs. However, there
was no coverage or inadequate coverage for a number of the reliefs
currently applied under the UK's transitional derogations, in
particular for children's clothing and footwear, and for a number
of the zero rates benefiting charities and disabled people. The
proposal was debated by European Standing Committee B in the last
Parliament.[25]
12.6 In July 2005 we considered document (b), a Luxembourg
Presidency compromise proposal, which the Government broadly supported.
It aimed at a balance between the views of the Commission and
of different Member States. The Presidency proposal was significantly
different from the Commission's draft Directive in that it would:
- maintain the transitional reduced,
super-reduced and zero rate derogations of the Sixth VAT Directive;
- extend until 31 December 2015 the time-limited
derogations in the accession treaties of the new Member States;
- provide a limited flexibility mechanism, by which
Member States could apply for Council authorisation to use reduced
rates for some of the labour-intensive services listed in Annex
K of the Sixth VAT Directive (small repair services, window cleaning
and cleaning in private households and hairdressing) and restaurant
services;
- extend permitted reduced rates in Annex H of
the Sixth VAT Directive to cover the remaining Annex K categories
(house repairs and domestic care services), supply of sewage and
waste-recycling services, district heating, and apparatus and
equipment (excluding means of transport) designed or specifically
adapted for the disabled;
- include in Annex H supplies of gas and electricity
and of plants and wood for use as firewood, which reliefs are
currently provided for elsewhere in the Sixth VAT Directive; and
- extend the provision for a minimum standard rate
of 15% until 31 December 2015.
12.7 We commented that the compromise proposal was
an improvement on the original proposal. But we noted that the
Government was still pursuing agreement to reduced rates of VAT
for repairs to listed places of worship, memorials, energy-saving
materials for DIY installation and energy-efficient products.
We did not clear the document and asked to be kept informed of
progress on this aspect.[26]
The Minister's letters
12.8 In her letter on document (a) the Paymaster
General (Dawn Primarolo) tells us the Government has now carried
out extensive consultations on the package of VAT simplification
measures, and will continue to do so as the proposals progress
through Council. She says there has been overwhelming UK (and
EU) business support for the entire package of VAT simplification
measures, except for proposed changes to the distance-selling
arrangements for goods (see paragraph 12.10 below).
12.9 The Minister also tells us that there was some
discussion of the proposals during the Dutch Presidency and none
under the Luxembourg Presidency. But discussion has resumed during
the present UK Presidency: the aim is to take the negotiations
as far as is possible so as to get broad agreement on the key
principles and on the approach to be followed by the following
Presidency.
12.10 As for the substance of the proposals the Minister
says:
- there is pressure from business
to improve the current VAT refund procedure in the Eighth VAT
Directive and a general willingness among Member States to work
towards that. But there is still work to be done on the detail
of the draft Directive to reform the procedure;
- for distance-selling of goods the Commission
propose changing the arrangements so that a single turnover threshold,
calculated across all Member States, would apply. It argues this
would be simpler for businesses, as they would only have to monitor
one running total rather than separate figures for each Member
State. But UK businesses have concerns about the proposed changes.
They do not find the present arrangements particularly difficult
and would prefer to retain them. This echoes conclusions reached
by many Member States;
- the Commission propose more discretion for Member
States over turnover thresholds for VAT registration. Many Member
States think the new proposed level too high in comparison to
rates currently applied by them, fearing domestic pressure to
increase their levels if the proposal were agreed. Whatever the
outcome the Government is confident that the UK's current threshold
(which is the highest in the EU) would not be put at risk; and
- an important issue addressed during the first
weeks of the UK Presidency is the legal base for the draft Directive
on reform of the VAT refund procedure. This has been put forward
under Article 29A of the VAT Sixth Directive, which is subject
to QMV, rather than Article 93 of the EC Treaty, which requires
unanimity. Member States regard this as a misuse of Article 29A
and are insisting the measure be based on Article 93.
12.11 In her letter on document (b), concerning reduced
rates of VAT, the Minister tells us that while many Member States
have supported the Luxembourg Presidency compromise, a small group
have remained opposed. All that could be agreed during that Presidency
was that the 15% minimum standard rate should be extended to 2010.
12.12 The Minister says that it is clear that Member
States have divergent views on the matter of reduced rates. She
summarises:
- a group of Member States, either
for philosophical reasons or in response to domestic budgetary
pressure, are both opposed to new reduced rates and would like
to limit the existing arrangements;
- other Member States would prefer more flexibility
in the system; and
- recent discussion has confirmed that the great
majority of Member States are opposed to new reduced rates for
goods, because of the theoretical possibility of distortion of
cross-border competition and consequent harm to the functioning
of the single market.
12.13 Therefore, the Minister continues, there is
no prospect of agreement on the draft Directive if those few Member
States who want new reduced rates for goods maintain that position.
However, she adds that prospects for an agreement containing new
reduced rates for locally delivered services, which might include,
for example, repairs to listed places of worship and construction
services related to memorials, are greater, albeit uncertain.
12.14 Finally, the Minister takes the opportunity
to alert us that the Government may be called upon to give political
agreement to the draft Directive at short notice. She says:
"Given the political importance of this
negotiation to a number of Member States, I believe it would be
severely detrimental to our Presidency to maintain a Parliamentary
scrutiny reserve at such a juncture. Whilst I and my officials
shall make every effort to ensure that scrutiny procedures are
respected as far as possible, I hope that the Committee will understand
should we find ourselves required to give political agreement
before scrutiny is completed."
Conclusion
12.15 We are grateful for the Minister's report
on where matters stand on the proposals in document (a) for simplification
of value added taxation, noting particularly the almost total
support for the measures by UK businesses. However we were surprised
by the Minister's information about the legal base for the draft
Directive on reform of the VAT refund procedure. Her original
Explanatory Memorandum told us, apparently incorrectly, that the
legal base proposed was Article 93 of the EC Treaty. The question
of unanimity as opposed to QMV on taxation issues is important
and we expect the Government to advise us accurately on such matters.
12.16 In addition to an assurance that such errors
will be avoided for the future, we should like the Minister to
keep us informed of developments on this issue and on the refund
procedure and threshold matters. Meanwhile we do not clear the
document.
12.17 As for the Minister's report on document
(b) we note the possibility that there will be no agreement on
this draft Directive. We note also the Minister's hope that, nevertheless,
there might be agreement in favour of new reduced rates for locally
delivered services, possibly including repairs to listed places
of worship and construction services related to memorials. But
we are concerned that the Minister makes no specific mention of
reduced rates for energy-saving materials for DIY installation
and energy-efficient products, the need for which the Government
has previously emphasised to us.
12.18 Given the continued doubt about the ability
to secure new reduced rates for locally delivered services, such
as repairs to listed places of worship and construction services
related to memorials, and the apparent likelihood that that it
will be impossible to secure new reduced rates for goods, such
as energy-saving materials for DIY installation and energy-efficient
products, we are also concerned about the Minister's suggestion
to us that the Government will override the scrutiny reserve.
It seems to us that, in the understandable desire, in the context
of the UK Presidency, not to be seen to frustrate progress on
this draft Directive, the Government is inclined to override our
scrutiny reserve, even though the reserve is based on UK interests
which the Government itself has drawn to our attention and which
remain unresolved.
12.19 We invite the Government to reconsider this
attitude and to keep us informed of developments on the draft
Directive, particularly in relation to repairs to listed places
of worship, construction services related to memorials, energy-saving
materials for DIY installation and energy-efficient products.
Meanwhile we continue to keep document (b) under scrutiny.
22 (24978) 13853/03: see HC 42-i (2003-04), para 1
(3 December 2003). Back
23
See headnote. Back
24
An experimental reduction of rates for labour-intensive services
in order to reduce unemployment: see (24618) 10220/03: HC 63-xxviii
(2002-03), para 21 (2 July 2003) and (24783) 11817/03: HC 63-xxxiii
(2002-03), para 1 (15 October 2003) and Stg Co Deb, European
Standing Committee B, 27 October 2003, cols.1-32. Back
25
See (24783) 11817/03: HC 63-xxxi (2002-03), para 1 (10 September
2003), HC 63-xxxiii (2002-03), para 1 (15 October 2003) and Stg
Co Deb, European Standing Committee B, 27 October 2003, cols
1-32. Back
26
See headnote. We reported separately on a Commission proposal
to extend the provision for a minimum standard rate of 15% until
31 December 2010 in paragraph 55 of the same Report. Back
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