By Chris Jones - 19th December 2005
A decision on whether to extend Europe’s reduced VAT scheme has been delayed once again after European leaders passed the buck back to finance ministers.
The scheme, which allows certain labour-intensive industries such as construction, bicycle repairs or hairdressing, to charge VAT at a lower rate of 5.5 per cent, is due to expire at the end of 2005.
European finance ministers failed to reach an agreement on extending the scheme at December’s ECOFIN council, calling instead for the matter to be decided by national leaders on December 15 and 16.
But with last week’s summit dominated by budget negotiations, EU leaders clearly had no stomach for further debate, and passed the responsibility back to ECOFIN “with a view to finalising agreement on the issue”.
The next ECOFIN meeting is scheduled for January 24, three weeks after the current reduced VAT scheme expires, and European businesses benefiting from the lower rates now face an uncertain future.
Although no firm commitments were made at the December ECOFIN meeting, it is thought that the European Commission will not begin infringement procedures against countries that allow the reduced rate schemes to continue into January.
But this period of grace is only likely to occur if Austria, which takes over the EU presidency from the UK on January 1, can broker a deal at the first ECOFIN meeting of the year.
The European Builders Confederation, which represents the sector most likely to be affected by an increase in VAT rates, called the lack of decision “a catastrophe”.
“This uncertainty and instability is a catastrophe for construction companies and their customers, and by no means encourages the confidence Europe needs so much,” said EBC president Jean Lardin.
The reduced rate scheme was introduced three years ago in a bid to stimulate job creation in a number of sectors, in particular those with a high concentration of black market workers such as construction.
“A return to normal VAT rates in the construction sector would lead to price increases, a drop in orders and activity, job losses and, last but not least, an increase in the shadow economy,” Lardin added.
“Is it so difficult to take a decision in order to avoid such a scenario?”
But the voluntary scheme, which is currently in operation in just nine of the 25 member states, has been a constant bone of contention.
France has led calls for a further extension of the scheme to other sectors, notably restaurants, but Germany, which has historically low VAT rates, considers it an anomaly and has consistently sought to block any extension of its scope.
Supporters of the scheme also want EU finance ministers to agree to a long-term extension of the scheme, which has been rolled-over on an annual basis since 2002, to at least 2015, arguing that this offers greater business security.
“We need an agreement, and a lasting agreement. We cannot imagine starting all over again with the same story in a one, two, three or five years’ time,” said Lardin.
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