VAT row to dominate EU finance meeting

A row over reduced VAT rates looks set to dominate this week’s ECOFIN meeting of EU finance ministers in Brussels.

A three-year experiment allowing some EU countries to charge a lower VAT rate on certain labour-intensive services comes to an end on December 31, Europe's finance ministers are split over whether to agree an extension until 2015.

Nine member states - Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal and the UK – currently apply reduced VAT rates to sectors as diverse as construction, window cleaning, bicycle repairs and hairdressing.

France is particularly keen to see the extension of the reduced rate to the restaurant and catering sector – President Jacques Chirac made it one of his re-election pledges in 2002 – which it believes would create more than 100,000 jobs.

But other countries – notably Germany, which has a low overall VAT rate – are concerned about extending the scheme to other sectors.

With an agreement needed from all 25 member states, the UK presidency has retabled a compromise proposal first put forward by Luxembourg in June.

This would allow an extension of the reduced rate scheme to the new member states – Poland and the Czech Republic have already expressed an interest – but would also limit the number of sectors where the rates would apply.

However, Britain has warned that it will not accept any moves to force it to scrap its zero VAT rate on children’s clothing – a move backed by both Ireland and Luxembourg.

The European Commission is not expecting a breakthrough at this week’s meeting.

“We don’t expect to see any major change in the positions of the member states, in particular Germany, where the new government is yet to take office,” a commission spokeswoman said.

“But there is still plenty of time for an agreement to be reached before the end of the year – compromises are often agreed at the last minute.”

Small businesses in particular stand to lose out if the scheme is not extended beyond the end of the year.

“If the experiment ends abruptly at the end of the year, thousands of small businesses will have to increase their VAT rates and consumers will be hit with sudden increased prices,” according to the French small business association, CGPME.

It claims that the reduced VAT rate has contributed to the creation of 85,000 jobs in the French construction sector alone – most of which would be lost if the rate increased.

“The destruction of thousands of jobs in sectors where a reduced VAT rate is applied is unacceptable,” CGPME said.

The finance ministers will also discuss measures designed to improve the quality of statistical information and measures against Hungary for breaking EU public deficit rules

They will also hear a presentation from Internal Market Commissioner Charlie McCreevy on barriers to cross-border takeovers in the financial services sector.

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