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Brussels, 16 July 2003

Reduced rates of VAT: frequently asked questions

(see also IP/03/1024)

Why isn't the Commission proposing a wider extension of reduced rates?

If reduced rates were extended to new sectors, this would lead to a lack of harmonisation in VAT rates, whereas it is vital to safeguard the Community acquis by maintaining the degree of harmonisation already achieved through the application of the standard rate currently in force in all or most of the Member States. Article 93 of the EC Treaty refers to the adoption of provisions for the harmonisation of legislation concerning turnover taxes to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market.

The Commission is convinced that the reduction of VAT rates is not the best way of encouraging consumers to buy or use certain goods or services. VAT, unlike excise duty for example, is not aimed at, and does not lead to, change in consumer behaviour. A reduction in VAT rates is never passed on in full in consumer prices. Very often it is negligible and temporary. Any economic mechanism based on the premise that a reduction of VAT will lead to a reduction in prices and, consequently, an increase in demand cannot work.

VAT is a consumption tax and its main objective is to generate tax revenue: each Member State uses this revenue according to its own priorities. It can never be used to subsidise particular sectors.

Why is the Commission proposing to limit the application of zero and super-reduced rates to Annex H goods and services only?

The Commission is not proposing the outright abolition of zero and super-reduced rates: these may be maintained for all the products and services listed in Annex H. This will mean that the most sensitive sectors for the Member States concerned will continue to be covered: they will continue to be able to apply rates of less than 5% to food, medicinal products, housing, etc.

This approach is perfectly in keeping with the policy adopted by the Commission and agreed by the Council during the negotiation of the Accession Treaties of the new member countries, and is indeed the only one truly compatible with it. All the derogations granted to them in respect of VAT rates are of strictly limited duration (the last expires on 1 January 2010) and relate almost exclusively to the goods and services listed in Annex H as amended by the current proposal. In the interests of consistency, therefore, this first step towards the rationalisation of the transitional derogations already in force in the current Member States has to be taken now.

Why is the Commission proposing to abolish the optional zero rate (or super-reduced rate) on children's clothing and footwear?

Only two countries, the UK and Ireland, currently apply a zero rate on these goods, while Luxembourg applies a rate of 3%. Every other Member State applies the standard rate. In the interests of consistency and simplification of the system, the Commission believes it is time to put an end to reduced rates for non-Annex H categories of goods and services, for which only a minority of Member States have been granted a specific derogation, for the following reasons:

    a survey of prices in the Community shows that zero or super-reduced rates do not mean a better price to the consumer: for example, if the average price of children's shoes in the EU is 100 (taking purchasing power parity into account), in Luxembourg (rate: 3%) the same shoes are 126, 119 in Denmark (rate: 25%) and 116 in the UK (rate: 0%)!

    Given that only three Member States apply these derogations, to maintain them would go against the objective of simplification and rationalisation pursued by this proposal.

    They are also liable to cause distortions of competition as they allow businesses in the Member States concerned to undercut the prices of businesses in other Member States which apply the standard rate or they allow them to maintain higher profit margins because of the advantage they enjoy in terms of VAT rates. Findings also show that children's clothing and footwear in the countries concerned are not significantly cheaper than adults' clothing and footwear despite the much lower rate of VAT. The same trend can be found in all the other Member States where the standard rate applies to all these goods.

    There is no definition of "children's clothing and footwear" at Community level and so the concept is interpreted differently in each of the three Member States concerned. They cannot be tied to a specific tariff heading in the common customs tariff which also leads to complications.

Why does the Commission want to do away with "parking rates"?

The "parking rate" applies to non-Annex H goods and services on which some Member States were applying reduced, super-reduced or zero rates on 1 January 1991 (derogation negotiated when Directive 92/77/EEC was adopted or in the Accession Treaty framework). The Member States concerned were allowed to continue applying reduced rates on them instead of the standard rate.

This measure was meant as a transitional arrangement for a smoother shift from the reduced rate to the standard rate when the internal market came into force on 1 January 1993: it was intended to be gradually phased out. Having applied for over 10 years, it is now proposed that this transitional measure be abolished.

What changes are proposed in the housing sector?

In order to rationalise this complex and chaotic situation and improve the functioning of the internal market, it is proposed to add a category to Annex H which will allow reduced rates to be applied to the following operations:

    the supply, construction, renovation, alteration, repair and maintenance of housing;

    the rental of housing where a Member State does not opt for exemption.

These changes not only substantially rationalise the reduced rates on housing but are a significant extension of Member States' option to apply reduced rates in the housing sector.

Under various specific derogations, several Member States are currently exempt from the requirement to apply the reduced rate solely to housing under social policy and apply it to certain operations in the private housing sector as well. There is no definition of social housing at Community level and it has therefore been defined variously in the legislation of different Member States. At the present time, housing is subject to the reduced rate under various measures in ten Member States.

The change will also incorporate two categories currently covered by the Directive authorising Member States to apply a reduced rate of VAT to certain labour-intensive services (renovation and repair of private dwellings, and window cleaning and cleaning in private households).

What will the rate be on gas and electricity?

The Commission is proposing to add a category to Annex H that will allow a reduced rate on the supply of electricity, gas through the natural gas distribution network and district heating.

All three forms of energy supply are network-based, share similar features and meet the same requirements. The standard rate will continue to apply to other energy products.

Member States are currently allowed to apply a reduced rate to natural gas and electricity provided the Commission gives its prior authorisation after examining the measure to ensure that there is no risk of distortion of competition. Experience has shown that the prior authorisation procedure can be scrapped as no complaint has been received and there is no evidence to the effect that the reduced rates applied in seven Member States have distorted competition. The Commission also proposes to stipulate that Member States applying different rates within a given Annex H category will only be allowed to do so on condition that this does not give rise to distortions of competition. It is up to the Member States to send the necessary information to the Commission, at its request, to check that this condition has been met. The prior authorisation procedure is, therefore, no longer justified.

Why is the Commission not proposing to allow a reduced rate on records, CDs and other audiovisual media?

Although a large-scale media campaign has developed in favour of reduced rates for records, CDs and audio cassettes, these sound media are clearly inseparable from other, audiovisual, media such as videos, DVDs, etc. A common approach is called for.

The standard rate is currently applied in all Member States to all audiovisual media. The current legislation does not allow any derogations and the situation is therefore relatively harmonised.

First, it should be remembered that a reduction in VAT rates very often has only a minor, temporary impact on consumer prices.

Second, the inclusion of these goods would be a backward step for the internal market as only a minority of Member States are likely to introduce the reduced rates, which would result in a substantial loss of revenue.

An extension of reduced rates to these products as part of an operation to rationalise and simplify reduced rates of VAT is therefore unfeasible. As such items are easily transportable, the risk of displacement and distortion of competition is fairly substantial.

Lowering the rate of VAT may not be sufficient to combat organised piracy effectively at international level or curb the growth of illicit and alternative markets. Even if a reduction in the rate of VAT were passed on completely in the final price to the consumer, the price would still in effect be higher than the black market price. Lowering VAT would therefore be more like a form of sectoral aid.

The same applies to computer piracy by downloading from the Internet: lowering the rate of VAT is unlikely to prevent consumers from continuing the practice. The equipment required for copying is sold freely and only a truly deterrent measure would be capable of changing habits. A reduction in VAT will not prevent this problem.

Lastly, while it is true that Article 151(4) of the Treaty stipulates that the Community must take cultural aspects into account in its action under other policies, the result of so doing must not go against the objectives of those policies. Article 93 of the Treaty pursues harmonisation of turnover taxes: the introduction of an option to apply reduced rates would go against that objective.

Why a reduced rate on books, newspapers and periodicals, but not on records, CDs, etc?

The reduced rate on books, newspapers and periodicals is an inescapable fact of history: the majority of Member States have always considered these items as having a major educational value which would justify treating them, like food and medicinal products, etc, as basic necessities subject to a reduced rate of VAT. That fact is still true today and, here too, it is important to maintain the degree of harmonisation already achieved (daily newspapers qualify for a reduced rate in all the current EU Member States).

But this category should be restricted to the paper version of these media and not extended to the digital, electronic or online versions which offer a variety of functions (searching, compilation, etc.) that make them comparable to services provided by electronic means, on which reduced rates are not allowed. And for the reasons outlined above, the category should not be extended to other cultural media, such as records, CDs, etc.

Why doesn't the Commission propose reduced rates for environmentally friendly products?

Requests for reduced rates in this context fall into two categories:

    requests for reduced rates for specific goods and services. Examples of this would include the supply of bicycles (on which no reduced rates are currently applied) and their servicing and repair (on which four Member States - Belgium, Ireland, Luxembourg and the Netherlands - are currently applying a reduced rate as part of the labour-intensive services experiment).

    goods of any kind which meet certain environmental standards. There have been many requests for reduced rates on organic products, for example, or products awarded a European eco-label.

Most of these goods and services are currently subject to the standard rate in all Member States and the level of harmonisation already achieved should be maintained. Also, it is important not to discriminate between similar products depending on whether or not they meet environmental standards: this would call into question the principle of neutrality of the VAT applicable to similar goods, a principle reiterated by the Court of Justice in its judgment of 3 May 2001.

A reduced rate for food products is already allowed and there is no need to introduce further distinctions in this sector.

Lastly, as stated above, a reduction in VAT rates very often has only a minor, temporary impact on consumer prices.

Why doesn't the Commission propose reduced rates for products which improve road safety, especially helmets and protective clothing for motorcyclists?

Unfortunately this is not an objective which can be achieved by a reduction in the rate of VAT: even if a reduced rate were applied, the purchasing price of such equipment is still high and a focus on special incentives to encourage people to buy it and use it is preferable.

The standard rate is in fact applicable throughout the Community except for the UK, which currently enjoys a specific derogation allowing it to keep a zero rate for motorcycle and bicycle helmets. The current proposal for a Directive proposes to exclude zero rates for non-Annex H products: the standard rate will therefore be applied across the Community.

Why isn't the Commission proposing to allow a reduced rate for renovation work on historical monuments?

Currently there is only provision for a reduced rate in relation to housing: nevertheless, one Member State (UK) applies a zero rate to certain types of work on historical buildings. However, the standard rate is applicable in the other Member States.

It would therefore be appropriate to put an end to this derogation and make the standard rate the norm. There is in fact no need for a reduced rate of VAT in this area: Member States have much more appropriate means at their disposal to finance work on historical buildings (direct subsidies or full cover for work carried out, grants to owners of listed buildings not used as housing, etc.).

Is this the end of the reduced rate for labour-intensive services?

Not necessarily. For the last few years some Member States have been allowed, on an experimental basis, to apply a reduced rate of VAT to certain labour-intensive services selected from a limited list. That list was never intended to be a comprehensive inventory of all labour-intensive sectors; catering, for instance, which many people would regard as highly labour-intensive, was not included.

The Commission is now proposing that a reduced rate be applied to housing and catering as a whole, so under the new Council Directive Member States will still be able, if they wish, to levy VAT at the lower rate on many of the services targeted for the experiment. This means that any Member State will be able to apply a reduced rate to the renovation and repair of private housing, for instance, even those who were not involved in the experimental scheme.

But for other services currently covered by the scheme, such as minor repairs, the reduced rate will no longer be available. Our best assessment of the results reported by the Member States is that the experiment has failed to show conclusively that a reduction in VAT has any real effect on unemployment or the "black" economy. Even if the whole of the VAT reduction was passed on in the form of lower prices to the customer, a cut in labour costs would create 52% more jobs at the same cost to the Exchequer.

So there is no real reason to continue with the "experimental" VAT reduction.

Will the reduced rates still be optional for Member States?

Yes. At the moment, the Commission believes the reduced rates should continue to be optional since they crucially affect Member States' budget planning and the way they organise their public finances. Member States will therefore continue to be able to apply a reduced rate to just a few of the categories in Annex H, or even to selected operations within a particular category.

What impact is the proposal likely to have on Member States' economies and budgets?

The proposal has been evaluated to assess the costs and benefits to national exchequers and the possible inflationary impact.

Member States which were formerly unable to apply a reduced rate to housing or catering but now decide to do so are likely to forfeit some revenue. But it is important to remember that:

  • the reduced rates are optional;

  • there is provision for an intermediate reduced rate, between the standard rate and the 5% minimum;

  • provided they comply with Community law Member States can restrict the scope of the categories listed in Annex H.

Which are the goods and services proposed by the Commission on which Member States would have the option to apply reduced rates?


1The supply of foodstuffs (including beverages, but excluding alcoholic beverages) for human and animal consumption; live animals, seeds, plants and ingredients normally intended for use in the preparation of foodstuffs; products normally intended to be used to supplement or replace foodstuffs
2The supply of water
3The supply of pharmaceutical products of a kind normally used for health care, prevention of diseases and treatment for medical and veterinary purposes, including products used for contraception and sanitary protection
4The supply of medical equipment, aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled, and apparatus and electrical, electronic or other equipment and means of transport, designed or specially adapted for the disabled

Repair of such goods.

Child car seats

5Transport of passengers and their accompanying luggage
6The supply, including on loan by libraries, of books (including brochures, leaflets and similar printed matter, children's picture, drawing or colouring books, music printed or in manuscript form, maps and hydrographic or similar charts), newspapers and periodicals, other than material wholly or substantially devoted to advertising matter
7Admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities

Reception of radio and television broadcasting services

8The supply of services by or royalties due to writers, composers and performing artists
9Admission to sporting events and use of sporting facilities
10The supply, construction, renovation, alteration, repair, maintenance and cleaning of housing. The rental of housing insofar as this service is exempted under Article 13
11The supply of goods and services of a kind normally intended for use in agricultural production but excluding capital goods such as machinery or buildings
12The supply of plants' bulbs, roots and the like, cut flowers and ornamental foliage and the supply of wood for use as firewood
13Accommodation provided by hotels and similar establishments including the provision of holiday accommodation, letting of caravan sites and caravan parks


Restaurant services
15The supply of goods and services by organisations recognised as charities by Member States and engaged in welfare or social security work, insofar as these supplies are not exempt under Article 13
16The supply of services supplied by undertakers and cremation services, together with the supply of goods related thereto
17The provision of medical and dental care and thermal treatment insofar as these services are not exempt under Article 13
18Domestic care services (e.g. home help and care of the young, elderly, sick or disabled)
19The supply of services supplied in connection with sewage, street cleaning, refuse collection and waste treatment or waste recycling other than the supply of such services by bodies referred to in Article 4(5).
20The supply of electricity, gas through the natural gas distribution network and district heating

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