London calls for rethink on VAT reform

Date: 11/12/1997

By Chris Johnstone

THE British government has called on the European Commission to put its ambitious plans to shake up the EU system for charging value added tax on hold and concentrate instead upon more practical problems.

The letter from London highlights worries that the overhaul of the Union's VAT system is going nowhere fast.

The cornerstone of the planned reform involves switching VAT charges to where goods and services originate rather than where they are consumed. This should, in theory, help to reduce fraud which is costing the Union billions of ecu a year as goods go 'missing' before they arrive in the shops or are delivered.

The UK argues that instead of concentrating on the overall reform, the Commission's time might be better spent on ironing out some of the practical problems, such as clearing up current disputes over where VAT should be levied.

“There is a big problem with hire cars at the moment. People in Belgium hire cars across the border in the Netherlands because it is cheaper but there is a question of where VAT should be paid,” said an official.

He added that some of the anomalies in the current system should also be looked at, such as the exemption for national post offices from paying VAT on parcel deliveries, even though they were competing directly with private express companies.

London claims its unease about progress on VAT reform is shared by other countries, such as Germany, which have in the past been firm supporters of the Commission's proposals. “We are saying that perhaps this should be put on the back burner for a while,” said a British official.

So far, the overhaul of VAT has made sluggish progress, with the Commission receiving a firm rebuff to its proposal to strengthen its advisory tax committee, which is staffed by national experts, and allow it to take some decisions on the basis of qualified majority voting.

The UK was one of the strongest opponents of the change which, it argued, would erode national governments' ability to take decisions on tax matters.

Even funding for the Commission's modest five-year proposal to boost tax cooperation between national authorities, the Fiscalis programme, has been cut from the original 45 million ecu to 40 million.

Difficult issues surrounding VAT reform, such as the harmonisation of rates necessary to deter companies from flocking to register for tax in the country where charges are lowest, still have to be addressed, even though laws establishing the new framework should be in place by the end of the century to enable the VAT change-over to take place by 2002.

Harmonisation of tax rates is a politically explosive issue, as demonstrated by the initial speculation this year over whether the Commission would accept British plans to cut VAT on domestic fuel from 8&percent; to 5&percent; and the dispute between the Netherlands and Belgium over lower Dutch VAT charges on cut flowers.