Last minute reprieve for EU reduced VAT scheme

Europe’s small businesses look set to avoid a massive rise in taxes with EU finance ministers expected to back new proposals on extending a reduced-rate VAT scheme.

Certain labour intensive services, such as bicycle repairs, hairdressing and home improvement, have been allowed to charge VAT at the lower rate of 5.5 per cent since 1999.

But although it has been extended several times, the scheme has never been made permanent, leaving many small businesses uncertain about their long-term finances.

Ministers have been debating the issue on and off since 2003, the last time the scheme was extended.

But opposition from Germany has made it impossible to reach an agreement on a permanent extension.

Germany believes the scheme distorts the internal market, making business conditions more favourable in some member states than in others.

Frantic talks at the end of last year ended in stalemate, despite the fact that the current scheme ran out at the end of 2005.

National governments were given until the first ECOFIN meeting of 2006 – which starts on Tuesday – to resolve the issue.

And resolution appears likely, with all 25 member states expected to back a new proposal, put forward by the Austrian EU presidency, extending the scheme until 2010.

They argue that this would give businesses greater certainty in the short-term without closing the door to a permanent extension in the future.

But if has backed down on the duration of the scheme, Berlin nonetheless appears have won the battle of wills with Paris over moves to extend the scope of the scheme.

France’s insistence that it would only agree to extend the duration of the scheme if its scope was broadened to include restaurant meals nearly brought negotiations to an abrupt end last week.

Last-ditch talks between German Chancellor Angela Merkel and French Prime Minister Dominique de Villepin failed to break the deadlock.

Paris is still insisting that “no deal has yet been done” and that it will continue to push for restaurant meals to be included, arguing that take-away food already benefits from the lower rates even though it is less labour-intensive.

However, the Austrian presidency now says it “does not foresee an extension” of the scope of the scheme at Tuesday’s meeting.

But it does expect consensus – even if it is likely to be grudgingly given by Germany – on the need to extend the duration of the scheme.

However, Vienna notes that “some member states want [the scheme] to expire after one final prolongation [while] others have taken a different view on this issue”.

It also calls for an independent review of the impact of the scheme before the end of 2006.

A review carried out by the European commission in June 2003 showed that there was no evidence to support claims that the scheme boosted job creation and reduced VAT avoidance.

Even if an agreement is reached on Tuesday, the legal basis of the scheme remains shaky.

The commission agreed in November to hold off from taking legal action against the nine member states where the scheme applies, even though they would technically be in breach of EU VAT regulations once the old scheme ran out on December 31 2005.

The commission said it would go into Tuesday’s meeting “with an open mind” but tax commissioner Lázsló Kovacs has hinted that any new agreement would have to be implemented as quickly as possible – and backdated to January 1 – in order to avoid sanctions.

Small business are already celebrating the extension of the scheme, even though they would have preferred a more permanent solution, with a roll-over until at least 2015.

“We are relieved that an agreement is expected after such a long period of incertitude,” said Jean Lardin, president of the European Builders Confederation.

Lardin had warned that thousands of jobs would be lost in the construction sector alone if the ministers failed to reach an agreement.

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