Local businesses could see cut in VAT under EU plans

7 July 2008

The European Commission has put forward proposals that would allow member state governments to reduce the rate of VAT on services that are provided locally and are labour intensive.

Should the plans go forward, then VAT charges could be cut on a whole range of locally sourced services.

These would include housing services, such as construction, maintenance and cleaning; restaurant and catering services; domestic care services, such as home help and care of the elderly; personal care services, such as hairdressing and beauty treatments; gardening; and the repair of movable, consumer goods, such as computers and clothes.

Under the current rules, governments are only able to reduce VAT rates in just two labour-intensive sectors.

The proposed changes, which need the backing of all member states to become law, were welcomed by the Federation of Small Businesses (FSB).

Tina Sommer, the FSB’s EU and international affairs chairman, said: “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. The British government must take advantage of these proposals to ensure our high street can survive the economic downturn.”

Ms Sommer added: “National governments should be given more control over how they use VAT to stimulate demand, so long as there are not drastic consequences for the Single Market. The UK has been allowed to exclude certain items, such as newspapers and children’s clothing, from VAT altogether, and this historic exemption must continue.”