Dutch push plan to slash VAT rates

Date: 12/02/1998

By Tim Jones

TAX breaks for hairdressers, fun parks and bicycle repairers may come a step closer next week when EU finance ministers consider Dutch-led plans to safeguard jobs in labour intensive services.

When ministers meet on Monday, the British presidency will present them with a minimalist blueprint which would allow some governments to slash the rates of value added tax applicable in traditionally 'black' sectors of the economy.

By keeping this tax reduction optional, the presidency hopes to overcome German, Austrian and Danish opposition to the idea.

"Nobody would have to do it unless they wanted to, which removes the argument about revenue loss," said a UK official. "Also, saying that it will not work is devalued because, if you believe that, you do not have to implement it."

The proposal is a key policy of the Dutch 'purple' coalition as it approaches a general election in May.

Late last year, Finance Minister Gerrit Zalm unveiled his coalition's tax reform programme with proposals to shift 4.5 billion ecu from direct taxation on to VAT by 2002 while raising the standard rate from 17.5% to 19%. Cutting the rate of VAT applicable to labour intensive services to 6% is a central plank of this plan.

To do this, the government must have the legal blessing of the European Commission since special VAT schemes can, if they have an effect across borders, undermine the single market.

Just before the EU's Luxembourg jobs summit in November, the Commission suggested reducing VAT on certain labour intensive services as long as they were supplied locally. The tax break would be confined to moveable goods, including bicycles, but not other modes of transport, house-repair, fun parks, cleaning services, home-help and unqualified social work.

The Commission was, however, reluctant to make a specific proposal until governments had given their support to the principle. The directive would allow member states to cut VAT, subject to review after three years.

At the last meeting of finance ministers in January, the Swedish and Finnish ministers supported Zalm, while Luxembourg's Prime Minister Jean-Claude Juncker called for the measure to be extended to hairdressers.

In recent official-level meetings, Germany has maintained its opposition to the idea, and has found support from Austria, Denmark and sometimes Greece.

Ironically, these same governments have argued about unfair competition in border areas as people cross into, say, the Netherlands from Germany or Belgium to get their hair cut.