Select Committee on European Scrutiny Twelfth Report


22 Value added taxation

(26583)

9125/05

Draft Council Conclusions on a draft Directive amending Directive 77/388/EEC as regards reduced rates of Value Added Tax

Legal baseArticle 93 EC; consultation; unanimity
DepartmentHM Treasury
Basis of considerationMinister's letter of 22 November 2005
Previous Committee ReportHC 34-vi (2005-06), para 12 (19 October 2005)
To be discussed in Council6 December 2005
Committee's assessmentPolitically important
Committee's decisionCleared

Background

22.1 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;[40] 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.

22.2 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.

22.3 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.[41]

22.4 Progress on this proposal proved difficult and in May 2005 the Luxembourg Presidency produced this 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.

22.5 During consideration of the Commission's original proposal and of the compromise proposal the previous Committee and we have been told that the Government's main concern has been to preserve the UK's threatened zero rates but that there was also an objective of securing reduced rates for repairs to listed places of worship, construction services related to memorials, energy-saving materials for DIY installation and energy-efficient products. We have noted previously the Government's view that the compromise proposal does not threaten the UK's zero rates.[42] However when we considered this document again in October 2005 we were concerned about three points:

  • doubt as to whether there would be agreement in favour of new reduced rates for locally delivered services, which might include repairs to listed places of worship and construction services related to memorials;
  • no specific mention by the Government of energy-saving materials for DIY installation and energy-efficient products; and
  • the expressed intention of the Government to override the scrutiny reserve on this document if there were a prospect of political agreement on it, despite the possibility of the Government's objective of securing reduced rates for repairs to listed places of worship, construction services related to memorials, energy-saving materials for DIY installation and energy-efficient products being unmet.[43]

The Minister's letter

22.6 The Paymaster General (Dawn Primarolo) writes now to say:

  • a number of Member States have reiterated the political importance to them of this issue, particularly in the light of the expiry of the labour-intensive services experiment, and there will be strong pressure to reach a deal on this proposal at the ECOFIN Council on 6 December 2005;
  • most Member States are opposed to new reduced rates for goods, such as energy-saving materials for DIY installation and energy-efficient products, as they believe that such rates would harm the single market by distorting cross-border trade and the Government's assessment remains that there is no prospect of an agreement that includes reduced rates for goods; and
  • there is more support for the argument that reduced rates for locally delivered services, such as repairs to listed places of worship and construction services related to memorials, do not harm the single market.

22.7 The Minister argues that blocking a deal in an attempt to secure reduced rates for energy-saving materials for DIY installation and energy-efficient products might put at risk the gains — no threat to zero rates and a reasonable chance on ability to apply reduced rates to repairs to listed places of worship and construction services related to memorials — and could lead to a less acceptable deal being tabled by a future Presidency. She says:

    "Taken as a whole, the package delivers the Government's main objective for this dossier and we hope that it can give us the ability to apply some of the new reduced rates that we have been pursuing."

22.8 The Minister also says:

    "I remain of the view that it would be detrimental to our Presidency — the credibility of which is key to ensuring that we can negotiate in the UK interest — to maintain a Parliamentary scrutiny reserve if Council is ready to reach political agreement. In that instance I regret that it might be necessary to override the scrutiny reserve."

Conclusion

22.9 We are grateful to the Minister for this further explanation of where matters stand on this proposal. We have no further questions to raise and accept the Government's assessment that the deal now in prospect is, in the circumstances, the best obtainable. We clear the document.

22.10 However, although the question of a scrutiny reserve override is now overtaken, we hope that the Government will remember that a nearing deadline is of itself insufficient justification for an override — substance, particularly matters which the Government itself has drawn to our attention as important, is what matters.




40   See (24618) 10220/03: HC 63-xxviii (2002-03), para 21 (2 July 2003) and Stg Co Deb, European Standing Committee B, 27 October 2003, cols.1-32. Back

41   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

42   See (26583) 9125/05: HC 34-i (2005-06), para 25 (4 July 2005). Back

43   See headnote. Back


 
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