Proposal for harmonized reduced rates of value added tax for 2011

The European Commission has made a proposal for a amending Directive 2006/112/EC as regards reduced rates of value added tax (COM(2008) 428/3) based on the study on reduced VAT applied to goods and services in the Member States of the European Union presented by Copenhagen Economics based on the Article 93 of the Treaty. Products referred in the proposal to have a reduced VAT are feminine sanitary protection and children's nappies, equipment for the disabled, e-books, housing sector, concerning foodstuffs, the supply of alcoholic beverages are not included.

Objectives of the Proposal

The Commission's objective is to ensure equal opportunities for Member States as well as more transparency, consistency and a smooth functioning of the internal market as regards reduced VAT rates for locally supplied services including labour intensive services and restaurant services. Some technical adaptations are also included in the proposal.

Reduced VAT rates are exceptions to the standard rate (minimum 15%). Before making a proposal for a broad review of VAT rates, the Commission needs evidence on the effectiveness of reduced VAT rates in order to promote certain policies without impacting on the proper functioning of the Internal Market. Likewise, the use of VAT rules as a tool in other EU policies needs further reflection and analysis before any in-depth review to rationalise and simplify the current rules.

Result of the preliminary study.

The study concludes that moving towards a more uniform VAT rates structure has considerable advantages from a purely economic point of view. Carefully targeted reduced VAT rates may, nevertheless, provide specific benefits, in particular in terms of economic growth: they can induce consumers to shift activities from DIY (do it yourself) and the "underground" economy to the formal economy.

Impact assessment

The proposal is a priority initiative in the 2008 Commission Legislative and Work Programme. The need to present a proposal relating to urgent issues called for a proportionate impact assessment strictly focusing on these issues.

The following policy options were assessed from an economic, social and environmental perspective:

  • No policy change.
  • The current provisions including the option for Member States to apply reduced rates to certain labour-intensive services is made permanent and available for all of them.
  • The list of these labour-intensive services eligible for reduced rates is extended to a number of other similar (small) locally supplied services for private households.
  • The list of these labour-intensive services is extended to a number of similar (small) services for some other non-commercial customers, such as repair, maintenance and cleaning of places of worship, cultural heritage and historical monuments
  • Member States have the option to apply reduced rates to restaurant services.
  • Member States can also apply reduced rates to the construction and (significant) alteration of private dwellings and to the supply thereof.
  • Member States can also apply reduced rates to the construction and significant renovation and alteration of some non-commercial buildings (such as places of worship, cultural heritage and historical monuments) and to the supply.


Products - Services involved:

Category 3 (pharmaceutical products).

Precise and slightly enlarge that category in order to clearly cover both feminine sanitary protection and children's nappies by using a generic wording.

Category 4 (equipment for the disabled).

Updating to technical progress. Current category 4 covers only medical equipment, aids and other appliances normally intended to alleviate or treat disability. The concept of disability is broad enough to encompass serious or chronic illness as well. However, equipment or apparatus specially designed or adapted for the disabled (e.g., Braille keyboards, specially adapted cars, etc.) are not eligible for the reduced rate even though they reply to the same needs. The Commission therefore proposes including them in category 4.

Category 6 (books, etc.)

The current wording covers only books on paper support. For reason of neutrality, an extension is necessary in order to also cover books that are on CD, CD-ROMs or any similar physical medium that predominantly reproduce the same information content as printed books. Thus, only recordings that fundamentally reproduce the written text in a book are covered. A recording that includes supplementary material such as games, search functions, links to other material and similar, apart from the text read aloud, continues to be subject to the normal VAT rate.

Category 8 (reception of radio and television broadcasting services).

These services are taxable supplies, not the reception thereof: these words have consequently been deleted.

Category 9 (supply of services by writers, etc.).

As royalties are not services for VAT purposes, but the consideration for certain services, the text has been rephrased.

Category 16 (supply of services by undertakers, etc.).

In order to separate the object of the definition of the reduced rate from the quality of the supplier it is proposed to link it to the kind of service provided and to rather refer to funeral undertaking services.

Category 18 (street cleaning, waste treatment, etc.).

The scope of this category is too narrowly defined with the result that services of a very similar nature are treated differently as regards rates. For instance, whereas street cleaning and household refuse collection are eligible for the reduced rate, there is no reference to sewer services. Likewise, the reduced rate may apply to waste treatment, but not to recycling. It is proposed to remove these inconsistencies.

Category 10a (new category).

is added to cover more broadly the housing sector. This amendment consists of a rationalisation and extension of Member States' option to apply reduced rates in the housing sector by removing the limitation to housing "provided as part of a social policy" and adding repair, maintenance and cleaning of housing (currently categories 2 and 3 of Annex IV). This possibility of applying a reduced VAT rate is also extended to services carried out on places of worship recognised by the Member State concerned and on cultural heritage and historical monuments, given their genuine cultural importance.
These changes are unlikely to create distortion of competition to the internal market: the place of taxation of services relating to immovable property is always at the place where the property is located. All providers of property-related services are therefore subject to the same conditions as regards rates regardless of the Member State in which they are established.

Category 12a (restaurant and catering services (new category)).

This addition is made to offer an equal treatment to all Member States but also because the supply of restaurant and catering services fulfil the same criteria as the other locally supplied services added. To assure consistency with category 1 concerning foodstuffs, the supply of alcoholic beverages is, however, excluded. As derogation to the principle "a single rate for a single transaction" that should apply in case of restaurant services, the exclusion of these beverages seems expedient to avoid a standard VAT rate applied to alcoholic beverages bought as such and a reduced VAT rate applied when they make up part of a restaurant service. The nature of the services concerned and the rules applicable to the place of taxation mean that the risk of relocation is minimal. Moreover, accommodation in hotels and similar establishments is already included in Annex III. The addition of restaurant and catering services can therefore be considered to be a justified rationalisation and provides equal opportunities to all Member States.

Categories 19 to 23 (locally supplied services (new category)).

The insertion of services other than labour-intensive services but of similar nature is necessary for reasons of coherence and equal treatment. To ensure legal certainty it is, however, appropriate to list the services concerned.