EU VAT rates inequalities continue

The original EU vision pictured the same VAT rates applicable across all EU countries. Cross-border trading could be carried out without having to make adjustments in EU Member States, using the origin principle. The market playing field would be level, with EU consumers and businesses sharing the same transaction tax burdens.

Harmonisation has not been possible. What happened? First, standard rates of EU VAT continued to be different, ranging currently from 17% to 27%. The average EU VAT rate based on GDP-weighting is just under 22%.  Second, Member States were permitted to introduce reduced rates of VAT, with a minimum of 5% being applicable to this classification for certain basic consumer items.

A listing, originally known as Annex H (now Annex III) provided the goods and services categories where non-standard rates would be allowed. In addition, grafted on to this classification are derogations granted historically to EU new entrants. These special cases add to the inconsistencies. Further, the introduction of twelve new central Europe countries in 2004 and 2007 have compounded the problem. Despite this, and true to the original vision, the Commission continues its policing drive towards ironing out the differences. This process can however prove to be difficult in the face of stern sovereignty resistance from Member States.

Examples of major divergence are in some of the most basic consumer items. Food in the UK is 0%, whilst in Bulgaria, Romania and Denmark the rate is 20%, 24%, 25% respectively. Hotel accommodation can range from 3% in Luxembourg and 6% in Belgium, Netherlands and Portugal, up to 20% in UK and Slovakia.

The current economic circumstances do not facilitate progress towards change. While politically, EU countries have been able to garner public support for standard rate increases, any tinkering or removal of reduced rate classification have usually been met with loud political opposition from consumers and affected business sectors.

Recent news from Bulgaria was of interest. Bulgaria is unusual in that, apart from the application of a reduced rate in the single area of tourist services including hotel accommodation, it is the only EU country to stick rigidly to all goods and services being subjected to the standard rate of 20%. Pre-budget lobbying for reduced rates has been sternly rejected publicly by Simeon Djankov,, Finance Minister.