VAT could be slashed under proposals from Brussels
The cost of eating out, converting your loft or hiring a childminder could be reduced under plans tabled by Brussels to cut VAT.
The European Commission wants to change tax rules so that specific services attract a reduced VAT rate. These areas include restaurants and beauty services such as hairdressers, as well as the care of the sick, elderly and young, housing renovation, clothes and computer repairs. Gardening would also be included in the rule changes.
The Treasury has welcomed the proposals and pledged to consider them carefully. If they get the go-ahead, then VAT on certain sectors could be reduced from the current 17.5% in the UK to just 5%.
The areas under consideration for a reduced tax of VAT are those that are labour-intensive and locally-supplied services.
The European Commission’s proposals have been seen as potentially offering a boost not only to consumers but also businesses.
The UK’s Federation of Small Businesses (FSB) says the timing of the changes couldn’t be better.
“As the credit crunch bites, some of the first luxuries to go will be home improvements, eating out and a trip to the hairdressers, so local businesses in these areas will welcome this move,” explains Tina Sommer, EU and international affairs chairman at the FSB.
“The British government must take advantage of these proposals to ensure our high street can survive the economic downturn.”
However, VAT cuts could potentially leave the government with a hole in public finances – a consequence that may put hold to any other tax cuts.
Currently, European Commission member states have differing rules regarding VAT breaks on specific services, with 18 out of 27 offering residents lower rates for services such as hairdressers and restaurants. The European Commission wants to see these permissions extended to all countries.
László Kovács, commissioner for taxation at the European Commission, says: “There is no reason why restaurant services, for example, should be allowed to benefit from a reduced rate in one half of the European Union but not in the other half."
What will be included:
* Minor repair of tangible movable goods, including bikes but excluding other means of transport. Examples include shoes, clothes, computers and watches.
* Cleaning and maintenance services of all these goods and, in this case, other means of transports are included.
* Domestic care services. For example, home help and care of the young, elderly, sick or disabled.
* All personal care services including hairdressing and beauty services.
* Gardening services.
* Restaurants and catering services, excluding alcoholic beverages.
* Printed books may also be subject to reduce rates, including audio-books.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.