Time running out on EU VAT rules

European finance ministers failed to reach an agreement on extending reduced VAT rates at their monthly meeting on Tuesday.

Exemptions from standard VAT rules are permitted in a handful of service sectors, allowing countries to charge a lower taxation rate, but these expire on December 31 2005.

Gordon Brown, the UK Chancellor of the Exchequer who chaired the ECOFIN meeting, confirmed that there was as yet no agreement on extending the current scheme.

“But I hope to report on some progress in this area after our next meeting,” he said.

The last ECOFIN meeting of 2005 will be held on December 6, just three weeks before the current reduced rate scheme ends.

Member states have been allowed to apply a reduced VAT rate in labour intensive services (including home, clothing and bicycle repairs, hairdressing and window cleaning) since January 2000.

Originally run as a three-year trial, the scheme was extended for a year in 2003 and was prolonged for a further two years until the end of 2005.

But some countries – especially those with traditionally low VAT rates such as Germany – oppose the scheme, arguing that it undermines the entire taxation system.

Business groups had hoped that ministers would agree on Tuesday to extend the scheme until 2015, as this would provide greater business certainty.

“Everybody knows the need and the urgency of finding an agreement,” the European Builders Confederation (EBC) said in a statement.

“Ending these [reduced] rates would have a negative impact on employment, which is the last thing the EU needs.”

The EBC said that construction sector prices would rise by up to 15 per cent if VAT was charged at the full rate, pushing thousands of workers into the black market.

“The only real winner would be the shadow economy,” the confederation urged, warning of 250,000 job losses in the construction sector alone.

“SMEs in construction find it difficult to understand why some countries oppose a system authorising member states to apply reduced VAT rates for locally provided services on a voluntary basis,” the EBC said.

“The reluctant countries would neither be obliged to apply the system nor would they be threatened by unfair competition.”

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