Brussels, 08/11/2005 (Agence Europe) - The ECOFIN Council examined a compromise on cut-rate VAT on 7 November unveiled by the British Presidency at the end of September (see EUROPE 90454), but failed to reach agreement on establishing a permanent cut-rate VAT system for local services which would not affect competition in the single market. Ministers will therefore be putting off any VAT decisions until the 6 December ECOFIN Council. Following resistance from a number of countries, the British Presidency is dropping the idea of a flexible mechanism to allow Member States to apply cut-rate VAT to certain services until 2015. The negotiations are now focussing on the scope of the list in Annex H of Directive 77/388/EEC of goods and services to which reduced VAT always applies. Extending the current transitional measures (due to end on 31 December 2005), set out in Annex K of the Sixth VAT Directive, cannot be ruled out at this stage. Sources suggest that this idea is not yet on the table, but political pressure is rising as the phase-out deadline approaches.
UK Chancellor of the Exchequer Gordon Brown said the ministers had held an in-depth discussion on cut-rate VAT, and other countries had made suggestions. He hoped progress would be made at the December ECOFIN meeting. German finance minister Hans Eichel said he would not be changing his views and, in any event, it would be the new German government which would decide on the issue. In the past, Germany has opposed extending the list of goods and services covered by cut-rate VAT, with the exception of catering. Austria follows suit, pointing out that it agreed to the transition scheme because the Council promised to find a solution for car leasing, where research indicates that cut-rate VAT has no impact on jobs. Sweden, Estonia, Slovakia and also, to a lesser extent, Slovenia are
part of this group that is hostile to greater use of reduced rates. France, which hopes to be able to add catering to the services that benefit from reduced rates, stressed the urgent need to find a solution. It pointed out that the best agreement should be based on the compromise of the British EU Council Presidency. Belgium stressed the importance of employment and Italy the need for legal security. Poland advocated that the new Member States which already apply reduced rates for some services should benefit from equal treatment (a possibility granted to them during accession talks but only on a transitional basis).
The Commission considers the lack of a decision in December would be a bad result. It stresses the need to find a lasting solution and may accept the idea put forward by the British Presidency that some local services such as restaurants, building and renovation of housing, healthcare and small repairs may permanently benefit from reduced rates. Technically, these services would be included in Annex H of the six VAT Directive 77/388/EEC. The Commission agrees with the British Presidency that other areas should not be added to this list as it fears competition distortion within the internal market. It stresses the optional nature of reduced VAT rates for Member States.