Select Committee on European Communities Fifteenth Report


200. In the field of indirect taxation, there are a number of proposals on the table for relatively minor changes to the existing system of Value Added Tax. We discuss these below, and then mention briefly the position on energy taxation and on excise duties (neither of which we have considered in this enquiry).


201. A destination-based system of Value Added Tax (VAT) was introduced in the Member States of the European Community in the early 1970s. Since then, goods exported from one Member State to another have been zero-rated for VAT purposes[121]; VAT is then imposed on these goods in the importing country. This has ensured that (with some exceptions) the VAT rates levied by Member States do not affect the pattern of competition between Member States, but it offers scope for fraudulently evading tax by diverting goods which have been zero-rated for export back into the domestic market. We consider below[122] the plans announced by the Commission in 1996 for a completely new and simplified VAT system. The Commission intended to bring forward proposals to implement the new system over a four year period. In fact, no radical proposals have so far been made, only a series of minor ones on the rates and scope of VAT, and on administrative simplification and the enhancement of co­operation. These are discussed below.


202. The Commission recently made an unsuccessful attempt to harmonise VAT rates further. To a routine proposal[123] to prolong the minimum standard rate of VAT at 15 per cent for a further period, it added a provision to specify for the first time a maximum rate, of 25 per cent. This aspect of the proposal was rejected. Instead, the Council agreed to repeat the previous Minute Statement[124] to the effect that Member States undertake to use their best endeavours to avoid widening the current span of 10 percentage points above the current lowest standard rates.

203. This saga can be presented in two ways. On the one hand, Commissioner Monti explained the Commission's initial proposal as an attempt to keep VAT rates down, demonstrating the Commission's determination that the tax burden should not rise (Q 235). On the other hand, Graham Mather pointed to the proposal as evidence of the Commission's intention to harmonise VAT rates (Q 173).

204. When the proposal to introduce a maximum standard rate of VAT came before us for scrutiny, we shared the Government's doubts about it. We therefore welcomed the Council's decision to substitute a Minute Statement, which has no legal force.


205. There is at present a proposal on the table[125] to allow Member States to choose to experiment with charging lower rates of VAT on labour-intensive services. Member States intending to make use of the power would have to seek approval from the Council, acting unanimously[126]. If distortions of competition arose as result of an experiment, the Commission could propose the revocation of an approval (obliging the Member State to restore the previous rate); the Council would act on such a proposal by qualified majority voting. Member States authorised to apply reduced rates would have to submit a report assessing the measure's effectiveness in terms of job creation and efficiency, on the basis of which the Commission would draw conclusions and recommendations for the future. The Government has no objection to the thrust of the proposal, though it is uneasy about the proposal for the use of qualified majority voting even in such a limited context (pp 43-44). And it has made clear that it would not intend to use the power in the United Kingdom - causing Commissioner Monti to comment ruefully that even when the Commission had attempted to return decisions on VAT rates to Member States not all of them had "reacted enthusiastically" (Q 229).

206. We do not believe that the proposed experiment to allow Member States to charge reduced rates of VAT on labour-intensive services would have much effect in boosting employment, but equally we do not believe that it would do much harm.


207. The VAT committee, which is made up of officials from Member States, chaired by the Commission, acts in an advisory capacity in clarifying questions of interpretation of VAT legislation. HM Customs and Excise explained: "The [Sixth VAT] Directive sets out a framework, and detailed national law applies it, so there are occasional inconsistencies in application that either the Commission or a Member State can bring to the committee for discussion" (Q 351). The committee operates by consensus (with no voting), and may issue guidelines reflecting agreed opinions; these guidelines are not binding on Member States.

208. A proposal[127] currently on the table would change the committee into a regulatory committee, with power to make binding decisions by qualified majority voting[128]. If a proposal from the Commission was not adopted by the committee, it would be submitted to the Council of Ministers for adoption, again by qualified majority voting; and if the Council failed to make a decision within three months the proposal would automatically be adopted. HM Treasury told us that the Austrian Presidency had suggested an "amended approach based on giving the committee decision-making powers but only on a more tightly selected set of provisions" and including "a 'safety stage' allowing a Member State to exclude from qualified majority voting any measures it considers might have serious budgetary implications" (p 42). Nevertheless, the Government has consistently opposed the proposal on the grounds that it could entail decisions which would affect United Kingdom revenues or interests being taken by qualified majority voting, and HM Customs and Excise told us that most Member States agree (Q 351). However, the Government supports the aim of making the VAT committee a more effective body, and is trying to find "a different way of skinning the same cat" through administrative reforms in the committee's working methods.

209. When we first considered this proposal, we were concerned that differences in interpretation and implementation of the VAT legislation were leading to uncertainty for businesses and governments and to the risk of double taxation or non-taxation. We took the view that if businesses supported the proposal, the Government's opposition to it would not be in the best interests of the full and equitable operation of the Single Market. We remain of that view, particularly if a "safety stage" can be incorporated in the procedure to allow Member States to veto proposals which would have serious budgetary implications for them. But we also commend the Government's pragmatic approach to making the procedures of the VAT committee more effective.


210. HM Customs and Excise told us that they placed a great deal of emphasis on mutual assistance: "Co-operation by revenue authorities who are committed to working together to tackle fraud and simplify systems for the benefit of business and bringing legitimate businesses into consultation so that you meet their needs while penalising the non-complier, that is the name of the game these days for tax administrators" (Q 366). The computerised VAT Information Exchange System made it easy to seek verification of cross-border transactions, and the Community-funded Fiscalis programme was providing for training and exchanges of officials to facilitate co­operation (Q 367).

211. Existing Directives[129] provide for limited mutual assistance between Member States in the recovery of tax debts. There is a proposal[130] currently on the table, which would modernise and extend the provisions in relation to both indirect and direct taxes. Because this proposal seemed to us to deal with administrative arrangements, we were surprised that the Government, though content with the substance, was insisting that it should be based on Article 94 rather than Article 95 EC[131], so that it would be subject to unanimity rather than to qualified majority voting. Martin Brown from HM Customs and Excise explained that because the proposal dealt with the recovery of debt, it would affect revenue: "On principle it is something where the Government thinks it has a revenue impact and therefore it must be unanimity" (Q 368).

212. We hope that the Government will not feel obliged to continue to block the proposal for improved mutual assistance for the recovery of cross-border tax debts on the grounds that it should be subject to unanimity not qualified majority voting. It seems to us a useful administrative measure, which could significantly improve recovery rates for indirect and direct taxes, and it is a pity to lose the potential gains because of a point of dogma. We could not understand how the proposal could have an adverse effect on the revenue of the United Kingdom - and if, as HM Customs and Excise suggest, "it would have a direct impact on the taxpayer who is pursued for their debt in another Member State", the Government is surely in favour of its residents paying the taxes due from them wherever they occur.


213. In response to the Simpler Legislation for the Internal Market (SLIM) initiative[132], the Commission has put forward a proposal[133] to bring about closer harmonisation of the rules on the right to deduct input tax. Under present arrangements, businesses incurring VAT in Member States where they are not registered must submit a claim for a refund to the Member State where the tax was charged. This Directive would give them the right to recover VAT in the Member State where they are registered, through their normal VAT return[134]; the proceeds would then be redistributed between the Member States concerned. The Commission argues that these simplified arrangements would need to be accompanied by harmonisation of the rules governing expenditure not qualifying for full input tax deduction. These rules (known as "blocking arrangements") cover expenditure which is incurred as part of the normal running of a business, but which is also intended to meet private needs, with the result that it is not easy to apportion it between the business and the private element. The Commission suggests that that this problem arises particularly in relation to car-related expenditure[135] and to accommodation, food, drink and entertainment[136].

214. The Government is still considering the proposal (p 43). It has recently completed a consultation exercise, which showed strong support for streamlining the refund procedures[137], but not for the proposed new harmonised blocking arrangements (which are stricter than those currently applied in the United Kingdom). Kris Romanski of HM Customs and Excise told us that agreement on the proposal seemed unlikely; there was considerable variation in practice as between Member States, and "there is great reluctance and very little reason, as Member States see it, to move away from their current position" (Q 371).

215. We consider that it would be desirable to reduce administrative burdens on businesses by simplifying the procedures for reclaiming VAT, and we do not think that this change of itself would be objectionable on subsidiarity grounds. We think that it could be introduced without harmonising the blocking rules, a proposal which we would not wish to accept.


216. We have no objection to proposals tidying up VAT arrangements, provided there are no significant new administrative burdens. Nor would we be concerned if proposals relating purely to the administration of VAT were adopted by qualified majority voting, or provided for subsequent decisions to be taken by qualified majority voting.


217. There are proposals for fundamental changes in energy taxation within the EU, to satisfy environmental rather than fiscal objectives. A draft Directive restructuring the Community framework for the taxation of energy products[138] was brought forward in the spring of 1997. Progress has been very slow, but according to HM Treasury the ECOFIN Council on 1 December 1998 agreed to continue discussion on "a framework based around" the draft Directive. The view of the Government is that "subject to the inclusion of a permanent exemption for the domestic use of energy, and the resolution of a number of technical issues, the United Kingdom would be willing to see progress made on a harmonised framework for energy taxation based on the draft Energy Products Directive" (p 44).

218. We decided that to cover the proposal for the taxation of energy products would make our enquiry unmanageably broad, not least because the issues on energy taxation are as much environmental as financial.


219. HM Treasury regrets that no acceptable proposals have been made for excise duties on tobacco and alcohol, since this leaves the United Kingdom exposed to smuggling from low-tax Member States, and distorts the market for alcoholic drinks (p 42). Other Member States are also adversely affected. The Irish Government recognises that the variations give rise to smuggling problems, and comments:

The National Association of Cider Makers drew our attention to the particular position of its members' product[139].

220. No acceptable proposals - or even principles - have yet been put forward in respect to excise duties. We share the Government's regret at this situation, but because of it we have not considered excise duties in the course of this enquiry.

121   That is to say that no VAT is paid on those goods in the Member State of origin. Back

122   See paragraphs 232-248. Back

123   Made in November 1998: 13409/98. Back

124   Minute statements have no direct legal force, though it is possible that they may have some legal effect as an aid to interpretation. Back

125   6110/99: the 25 May ECOFIN referred the proposal back to Coreper "for further discussion with a request for a list of eligible services" (Official Report, WA col 167, 16 June 1999). Back

126   Rather than from the Commission as in a previous idea (12316/97). Back

127   9118/97. Back

128   In accordance with the procedure laid down in Article 2 III (a) of Council Decision 87/373/EEC. Back

129   Council Directive 77/799/EEC of 19 December 1997 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation, as amended by Council Directive 79/1070/EEC of 6 December 1979 (which extended the original Directive to cover VAT as well as direct taxation). Back

130   8089/99, replacing a previous version (9877/98). Graham Mather of the European Policy Forum accused the Commission of trying to sneak this proposal through by stealth, because he considered that its content was not apparent from its title (Proposal for a European Parliament and Council Directive amending Council Directive 76/308/EEC on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties and in respect of value added tax and certain excise duties). We have some sympathy with his point. Back

131   At that time, Article 100 rather than 100a. Back

132   The relevant report was document 12603/97. Back

133   9741/98. Back

134   This would involve repeal of the Eighth VAT Directive and amendment to Article 17 of the Sixth VAT Directive, though the Commission points out that it is still far from its desired objective of a system based on a single place of taxation (see paragraph 236). Back

135   Where full input tax deduction would be allowed only to "taxable persons whose activity consists in the operation of passenger cars or who rely on such goods to engage in their activity … [provided that] any non-business use is negligible, that is less than 10 per cent"; in all other cases, deductions would be allowed on the basis of the proportion of business use. Back

136   Where recovery of VAT incurred would be limited to 50 per cent. Back

137   Where "a large majority welcomed any attempt to simplify the procedures": VAT: consultation document on European Commission proposal for revised rules on input tax deduction: Summary of responses, paragraph 18 (sent to the Chairman under cover of a letter of 19 May 1999 from the Paymaster General: not printed with this Report). Back

138   6793/97. Back

139   The Association is concerned that closer harmonisation of excise duties could weaken the market position of cider, unless existing differentials are maintained (p 179). Back

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