The European Parliament has adopted the report of the Commission to allow Member States to reduce VAT rates on a new series of goods and services, such as restaurants, children’s prams, audio books and beauty treatments.

On an experimental basis which runs to 2010, Member States were allowed to apply lower rates on certain labour intensive services. The Commission is now proposing that this possibility should continue indefinitely.

It also incorporates some additional labour-intensive or locally supplied services where there is no risk of distorting the single market , and this would now include:

• Restaurant services.
• Domestic care services for the young, sick, disabled or elderly.
• Beauty treatments of the sort provided in hairdressing salons.

A number of updates and additions are proposed to the other categories where reduced rates of VAT are permitted.  This includes making audio books or books supplied on CD-Rom eligible for reduced rates as well as children's car seats or renovation works designed to save energy and to get a higher level of efficiency.

However, an amendment to extend the possibility to reduce VAT rates also to alcoholic drinks served in restaurants has been rejected.

Context

In 1999, the Council adopted a directive about the VAT for labour intensive services.  It authorized a reduced VAT rate on several services for three years in nine Member States: Spain, Belgium, France, Greece, Italy, Luxembourg, Netherlands, Portugal and the United Kingdom. Later, the Council extended the directive until 2010.

Last year, the European Commission made a proposal for a amending Directive 2006/112/EC as regards reduced rates of value added tax based on the study on reduced VAT applied to goods and services in the Member States of the European Union presented by Copenhagen Economics.. Products referred in the proposal to have a reduced VAT were feminine sanitary protection and children's nappies, equipment for the disabled, e-books, housing sector and concerning foodstuffs.

The basic rules for rates are simple: goods and services subject to VAT are normally subject to a rate of at least 15%. Currently, 11 Member States apply a reduced rate to restaurant services.

In 2003, the European Parliament asked for an extension of the list of goods and services with reduced VAT rates. Specifically, it requested that Member States could apply a lower VAT rate to audio and video recording, hairdressing salons, dry cleaners and children's clothes and shoes.