Reduced VAT future

24 April 2008

The Ecofin Meeting on January 24 Approved the extension of laws allowing reduced rates of value-added tax (VAT) to be applied to certain labour-intensive industries, including construction. The existing directive has been extended until the end of 2010, pending the agreement of Poland, Cyprus and the Czech Republic. These three countries' decision was due by 3 February.

Originally launched in 1999, the 'Reduced VAT Directive' (1999/85/EC) gave Member States the option of applying a reduced rate to certain businesses. The decision as to whether to allow a reduced rate rested with national Governments, but the expiration of the directive would have removed that choice.


According to the European Construction Industry Federation (FIEC), the directive has proved a success in the countries where the option was taken - Belgium, France, Italy, Portugal and Spain. It estimates that 170000 jobs were created in these countries as a result of the directive, without impacting on public finances. It also says that the law has helped curb 'undeclared' construction work in these countries. According to FIEC's report, up to 250000 jobs could be lost in construction if the reduced VAT directive was allowed to expire.

Commenting on the provisional decision, FIEC president Wilhelm Küchler said, “I am glad to see that many years of joint efforts by FIEC and is member associations, based on serious studies, as well as a responsible attitude and targeted lobbying activities have finally led to the approval by a vast majority of the Member States of the proposals put forward by the Austrian Presidency. We hope that actions towards the three undecided countries will be successful.”


A unanimous decision by all 25 Member States is needed for the extension to be granted. “The right of veto must not be used as a threat in respect of a measure which, I would remind you, remains only an option,” said Mr Küchler.

The wording of ECONFIN's minutes describes the extension of the directive as prolonging “the experiment of reduced rates.” This is a key political point, as a number of Member States, most notably Germany, are opposed to the reduced VAT option.

As part of the compromise, the extension period will see the Commission study the impact of reduced VAT. A report will then be presented to the Council and Parliament by the end of June 2007. The key areas of interest for this report will be the effects of reduced VAT on job creation and economic growth in locally supplied services. The report is also expected to look at whether different rates of VAT distort the internal European market.

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