3 VALUE ADDED TAX
(26739)
11439/05
COM(05) 334
| Amended Draft Directive amending Directive 77/388/EC as regards the place of supply of services
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| Legal base | Article 93 EC; consultation; unanimity
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| Department | HM Treasury
|
| Basis of consideration |
SEM of 10 January 2006 |
| Previous Committee Report |
HC 34-v (2005-06), para 6 (12 October 2005) |
| To be discussed in Council
| Not known |
| Committee's assessment | Politically important
|
| Committee's decision | For debate in the European Standing Committee (decision reported on 12 October 2005)
|
Background
3.1 . 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.[4]
In this present document the Commission have proposed 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.
3.2 But 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.
3.3 When we considered this amended draft in October
2005 we recognised the case Government had made in support of
this proposal to change the place of supply of certain services
for private consumers. It 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, we noted
that UK consumers would no longer be able to benefit from cheaper
sources of supply, being forced to pay a higher rate of tax, and
that it could be argued that in effect they would be deprived
of the advantage that arises from the single market. We concluded
that the House would wish the opportunity to examine this proposal
further from the point of view of the consumer and to that end
recommended that the draft Directive be debated in the European
Standing Committee.[5]
The revised text
3.4 The Paymaster General (Dawn Primarolo) writes
to draw our attention a revised text, a Presidency compromise,
of the amended draft Directive, so that it may be taken into account
in the European Standing Committee debate. In her Supplementary
Explanatory Memorandum the Minister tells us that this text takes
account of changes to business to business supplies, discussed
in 2004, and to supplies to private consumers that were discussed
throughout the UK Presidency. She says:
- the treatment of the majority
of services is not significantly different to the amended draft
Directive — services capable of being supplied across borders
would be taxed in the country where they are consumed, so telecommunications,
broadcasting, electronic services and long-term hiring of vehicles
would be treated as made where the consumer resides;
- the treatment of business-to-business supplies
is similar to the original draft Directive, although the structure
of the text has been changed significantly in order to clarify
and simplify it an to ensure services that have the same treatment,
whether provided to business customers or private consumers, are
dealt with in the same Article;
- changes to the place of taxation rules in this
proposal and for the one-stop scheme,[6]
would make permanent the temporary changes agreed in the e-Commerce
Directive,[7] which come
to an end on 30 June 2006 and place Community and non-Community
businesses in the telecommunications, broadcasting and electronic
services sectors on the same footing;
- distance teaching services, which were to be
taxed in the Member State where the customer resides, have now
been removed from this category in response to concerns of Member
States as to the benefit of amending the rules in respect of these
services, which are predominantly exempt from VAT;
- the provision of all services on board ships,
aircraft and trains, not just restaurant and catering services,
would now be treated as made in the country of departure, in response
to the view of a majority of Member States that the rules concerning
all such services could benefit from simplification;
- the original provision that supplies between
branches of the same legal entity (branch-to-branch supplies)
are not supplies for VAT purposes has been removed as many Member
States considered that existing legislation already achieves the
same result (in a current case before the European Court of Justice
the Advocate General concurred in this view); and
- the original proposal for a category for a general
description of services that are immediately consumed was thought
by Member States to be vague and confusing and preferred and has
been replaced by definition of the services concerned —
that is restaurant and catering services and short-term car leasing.
The Government's view
3.5 The Minister says the policy implications of
this proposal have not changed and reiterates the Government's
revenue and competitive threat case for supporting the measure.
Conclusion
3.6 We are grateful to the Minister for drawing
our attention to the revised text of this amended draft Directive
so that it can be taken into account in the forthcoming debate.
4 See (25221) 5051/04: HC 42-ix (2003-04), para 19
(4 February 2004) and HC 42-xviii (2003-04), para 4 (28 April
2004) and also Stg Co Deb, European Standing Committee
B, 10 March 2004, cols. 3-22. Back
5
See headnote. Back
6
See (26118) 14248/04: HC 34-xi (2005-06), para 7 (23 November
2005). Back
7
See (23163) 5954/02: HC 152-xxxviii (2001-02). para 37 (16 October
2002). Back
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