22 Value added taxation
| (26583)
9125/05
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| Draft Council Conclusions on a 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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| Department | HM Treasury |
| Basis of consideration | Minister's letter of 22 November 2005
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| Previous Committee Report | HC 34-vi (2005-06), para 12 (19 October 2005)
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| To be discussed in Council | 6 December 2005
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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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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