Support for VAT cut on high-labour services

Date: 10/12/1998

By Tim Jones

FINLAND and the Netherlands have moved closer to winning EU approval for plans to cut sales taxes on traditionally 'black' sectors of their economies.

The German government, which under Chancellor Helmut Kohl had opposed cutting value added taxes on labour-intensive services, has now accepted the idea in principle for "an experimental period".

This has been welcomed in The Hague, where the Labour-led coalition plans to shift 5 billion ecu from direct to indirect taxation within four years and reduce VAT on labour-intensive services from 17.5% to just 6%.

The Dutch and Finnish governments had hoped for a proposal from the European Commission before the summer to allow low-tax schemes for services such as house-repairs, unskilled social work and staffing fun-parks. Instead, they had to wait until after the German elections in September to raise the issue once again.

At a 'jumbo' meeting of EU finance and employment ministers last week, Dutch Social Affairs Minister Klaas de Vries won support from Finland, Ireland, France and Belgium.

His German counterpart Walter Riester stated that while Bonn had no plans to introduce a similar scheme at home, it would not stop others bringing in cut-rate VAT for non-competitive services for a set period.

Shortly before the EU's 'jobs summit' in Luxembourg last November, Tax Commissioner Mario Monti suggested reducing VAT rates for specific services, subject to review after three years.

The areas proposed included repair work on moveable goods including bicycles, home help and unqualified social work for young, handicapped and elderly people, house renovation, cleaning and laundry services.

"If you have activities of very little if any cross-border impact, we cannot see how this would affect the single market if those member states exercise their option and others do not for an experimental period," Monti told the European Parliament this week.

But he is reluctant to make a specific proposal until all 15 governments have given their support in principle to the idea.

Denmark remains hostile to the move and tried to remove references to it from the EU's 1999 guidelines for employment policy. It claims that cutting VAT on labour-intensive services would be costly and make the system more confusing.

"This debate is not over by any means," said Monti.

Member states which are interested in introducing special VAT regimes will now write to the Commission outlining the sectors where they believe it should apply.