EU reduced VAT rates review

The European Commission (EC), the administrative body of the European Union, is planning to review allowing member states more freedom to set their reduced VAT rates for various goods and services.  This was announced on the 27 October 2015 as part of the EC's 2016 Work Programme.

The review is backed by EC President Jean-Claude Junker.  It will include an assessment of the impact of reduced VAT rates on new technologies, including e-books, and will commence in 2016.

The review represents a reversal of the position of the EC on reduced VAT rates. Since as recently as 2013, iit had been calling for a full withdrawal of the use of reduced VAT rates based on them being a distortion of the single market for goods and services.

Currently, the 28 member states are free to set their standard VAT rates with the single proviso that they are above 15%. The current lowest rate is 17% in Luxembourg. The highest rate is 27% in Hungary. Under the EU VAT Directive, Article 98, Directive 2006/112/EC, countries may have one or two reduced VAT rates, the lowest of which must be 5% or above. Member states can only use the reduced VAT rates for the goods and services in an exhaustive list in Annex III of the Directive.

This has created friction recently between the member states. The EC was forced into referring France and Luxembourg to the European Court of Justice in March over their use of the reduced VAT rates on e-books – printed books currently are listed in Annex III. The ECJ ruled that e-books were a service, and not a good like printed books, and so could not enjoy reduced rate.  This forced France and Luxembourg to raise VAT on e-books from their reduced rates (5.5% and 3%, respectively) to their standard VAT rates (20% and 17%, respectively).

Other countries such as Germany, Italy and Poland subsequently backed France and Luxembourg in their view that this breached the EU concept of fiscal neutrality, which requires that EU tax rules do not distort the operation of the single market.

On October 20 2015, Poland challenged the ebook vat rate ruling at the ECJ.

In addition to the Annex III rules, new member states used to be able to gain the right to apply the reduced rates on any goods that were already in place prior to accession to the EU.  This has meant countries like the UK have a very long list of goods at nil rates, including food and children's clothing.  However this loophole was withdrawn over ten years ago.  This meant, for example, that Poland had to hike its reduced VAT rate on children's clothing to its standard rate of 23% following an ECJ ruling in 2008.

The EC had a similar 'victory' against Spain over the use of the reduced VAT rate on medical goods.  It also blocked the UK applying 5% reduced VAT on energy saving products in June 2015.

In a number of states, the issue of nil rating of women's tampons has been hotly debated in recent weeks.  Member states have limited powers to cut their rates without majority backing of all other member states.