The future of reduced VAT in Europe

By FIEC11 June 2008

The Commission is now in favour of permanently allowing reduced rates of VAT for private repair and maintenance work. FIEC is now focussing its efforts on Member States to ensure those opposed to reduced VAT do not de-rail the legislation.

The original ‘Reduced VAT rates' Directive (1999/85/EC) of 1999 allowed EU Member States to apply reduced rates of VAT to certain labour-intensive services, including the renovation and maintenance of structures. Laws were extended in 2006 by Directive 2006/18/EC, which is due to expire at the end of 2010.

With this deadline looming, the European Commission has launched a number of initiatives to find a definitive solution for the issues surrounding reduced VAT.

Among these was a study last year on the impact of reduced VAT to locally supplied services. The Commission presented the conclusions last summer, as well as a preliminary outline on how reduced VAT rates might be applied across the EU - Communication COM(2007)380. The main idea was to simplify the current legislation by proposing a three-level VAT structure - very low, intermediate and standard rates.

The Commission published a consultation paper in March this year to gather the views of stakeholders concerning the possible future direction of reduced VAT rates on various categories of labour-intensive services supplied locally, such as housing.

In parallel, the European Council, with the support of France and the UK, asked the Commission to examine areas where economic instruments, including so-called "green VAT", could play a role in increasing the use of energy-efficient goods and energy-saving materials - such as home insulation materials.

How the EU will respond to all of this remains uncertain.

FIEC position

FIEC has always called for Member States to be given the right to apply a reduced VAT rate on renovation and maintenance of private dwellings. The positive impacts of permanent reduced VAT include higher economic activity and employment. It is also a good way of combating undeclared labour and promoting the use of energy-saving materials.

However, the Commission has not agreed that reduced VAT is the best solution for consumers - at least as regards "green VAT". It considers direct payments or tax deductions to be more efficient ways of promoting environmentaly friendly products.

Within the Council however, two main groups of Member States can be identified. There is group of countries that rules-out any major extension of the reduced VAT system. However, these countries generally agree to consider reduced rates for certain services because of their effectiveness in stimulating growth and employment. A second group of countries wants to be able to levy reduced VAT as long as the measures, applied mainly to locally supplied services, do not create an un-level playing field.

Construction

Despite the Commission's doubts as to the way forward on reduced VAT and compared to other sectors, the construction sector is in a fortunate position. The Commission believes that withdrawing reduced VAT rates where they are currently in place and going back to the standard rate would lead to thousands of job losses.

Indeed, according to a FIEC study carried out in March 2005, it was estimated such a move would threaten up to 250000 jobs. However, the main negative effect would be a major increase in undeclared work.

The Commission therefore intends to allow permanent application of reduced VAT rates in the fields where they are already permitted, and may introduce new ones. This means it may even consider extending reduced VAT to the entire housing sector.

The Commission recognises that applying reduced VAT rates in the construction sector does not affect the smooth functioning of the Internal Market as it concerns immovable property and locally provided services.

In this context, the main challenge will now be to convince those Member States which are opposed to applying reduced rates of VAT not to prevent others who are satisfied with the current system from doing so.

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