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European Standing Committee B
Monday 27 October 2003
[Mr. Jonathan Sayeed in the Chair]
Reduced Rates of VAT
4 pm
The Paymaster General (Dawn Primarolo): Good afternoon, Mr. Sayeed. May I say how pleased I am to have this opportunity to set out in more detail the Government's approach to this review of reduced rates of value added tax? The explanatory memorandum submitted on the proposal made it clear that it is unacceptable in its current form and I am sure that the Committee shares the Government's concerns. I can today reassure hon. Members that our resolve to resist the proposal in its current form is absolute and has been unrelenting during the ongoing negotiations.
It might be helpful for me to give hon. Members a brief reminder of the nature of the Commission's proposal. Currently, member states can apply up to two reduced rates of VAT, of not less than 5 per cent., to the supply of certain goods and services listed in annexe H of the sixth VAT directive. In addition, member states have been able since their accession to retain by derogation some zero and sub-5 per cent. rates. The proposal seeks to do away with member states' specific derogations for their zero and other reduced rates, while extending annexe H to cover only those reliefs that a majority of member states apply. Member states would be allowed to continue their zero and sub-5 per cent. rates only if the supplies in question fell within the new annexe H. Of course, once annexe H applied, it would be open to all member states to apply a reduced rate of 5 per cent. or more if they wished to do so.
As a result of that approach, well-off Parisians could pay a reduced rate of VAT for eating in restaurants and buying flowers, while UK parents would bear an additional 17.5 per cent. VAT when buying clothes and shoes for their children. In addition to the rate on children's clothing, a number of our zero rates for supplies to charities and disabled groups would also be rendered illegal. The Commission's proposal would add more than £1 billion in VAT to annual expenditure in the UK, much of it falling on low-income families, charities and disabled people.
Frankly, the Commission's proposal beggars belief, and we have said that, if necessary, we will veto it. My right hon. Friends the Chancellor and the Chief Secretary to the Treasury have made it abundantly clear at recent Council meetings that we will not agree to the removal of any of our zero or reduced rate derogations, which the UK has applied ever since our accession to the European Community. Our system of zero and reduced rates means that VAT in the UK is a broadly neutral tax across the income spectrum and helps us to achieve our social objectives, such as
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minimising the tax burden on lower-income families. The Commission appears to have seriously underestimated the national importance and political sensitivity of zero rates for us and others. It no longer does so.
We know that we are not alone in rejecting the proposal. It is clear from discussions with our European colleagues that virtually all of them are unhappy with some aspects of it. For some it goes too far and for others not far enough. The Irish have said that they would be prepared to veto it and many other member states have voiced strong opposition, but the Italian presidency is still keen to make quick progress on this dossier despite the political difficulties.
You might ask, Mr. Sayeed, what the Commission was thinking of when it made this proposal. Well, in so far as it has any supporting rationale, it is that the VAT system needs further simplification and that VAT rates need greater harmonisation. I hasten to add that that is the Commission's view. The Government can accept the need for simplification, but greater harmonisation of rates is not needed. Before the Commission interferes in member states' affairs, it is for it to demonstrate that such interference is necessary to ensure the proper functioning of the internal market. In fact, the Commission has provided no evidence that our zero rates cause distortion or that a reduced rate for restaurant services, cut flowers or broadcasting services would not create such distortion.
The Committee has an interest in the labour-intensive services experiment, in which the UK chose not to participate, as it believed that there were better ways to stimulate employment in the sectors concerned. Despite concluding in its report of 2 June that those reduced rates were not effective at stimulating employment and that their financial costs were disproportionate to their economic effects, the Commission proposes the continuation of three out of the five labour-intensive services by including them in annexe H.
In summary, the proposal is flawed. It applies no underlying rationale other than the prevalence with which VAT reliefs are currently applied, and it is unsupported by anything remotely resembling robust evidence. The Commission has seriously misjudged the sensitivities of member states' long-held derogations. For all those reasons, the proposal is unacceptable.
A number of hon. Members will have received representations from constituents and trade bodies keen for annexe H to be expanded to enable us to consider a reduced rate for the sector that concerns them. However, the Commission's unfortunate approach to the review has narrowed the scope for considering the introduction of new reduced rates. I am sure that the Committee will agree that defending our much-valued zero rates must be our priority, but we continue to press in the negotiations our long-standing proposals that annexe H should include repairs to listed places of worship and the purchase of energy-saving materials for do-it-yourself installation.
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Our proposal for energy-saving materials would correct the current anomaly whereby there are reduced rates in respect of the commercial installation of those materials in the UK, while their purchase for DIY installation is standard rated. We should like to be able to do something about that and we are pointing out forcefully to our European colleagues that it is odd in this day and age that a proposal should provide tax relief for energy consumption, but not energy saving.
We also think that some of the VAT burden should be removed from the congregations of our fine listed churches and other places of worship, to help with the costs of their preservation for current and future generations to enjoy. Without that help, the expense of engaging skilled craftsmen and using the right materials might prove too much and that important part of our built heritage could be at risk. That is why we remain committed to securing a permanent reduced VAT rate, although, pending the outcome of the review, we have introduced the listed places of worship grant scheme.
I look forward to what I am sure will be an interesting and robust debate under your chairmanship, Mr. Sayeed. I hope that my opening remarks have given a clear steer as to the Government's intentions.
The Chairman: We now have until 5.30 pm at the latest for questions to the Minister. I remind hon. Members that questions should be brief and asked one at a time. There is likely to be ample opportunity for all hon. Members to ask several questions, after which there will be a maximum of one hour for debate.
Mr. Stephen O'Brien (Eddisbury): I will adhere to your admonition that we should restrict ourselves to single questions at this stage, Mr. Sayeed. I will see whether I can catch your eye later to add to my first question.
Subject to various issues that I wish to highlight during our proceedings, Opposition Members will support the Minister on the robust position that she has outlined. Did she need to bring the measure before a European Standing Committee at this stage, or did I understand her to say that, although it would be inappropriate for us to seek to negotiate by Committee, this would be a useful opportunity to reinforce the Government's hand in the councils of Europe as they consider it?
Dawn Primarolo: I welcome the hon. Gentleman to this scrutiny debate; I know that this is the first time that he has led for the Opposition in such a debate.
The Government do not select the proposals that are discussed. The Government, as we progress through proposals, submit explanatory memorandums to the European Standing Committee.
The hon. Gentleman's second point is important, and the Committee may have had it in mind when selecting for debate the matter that we are considering. It underlines the point that has already been made forcefully by the Chancellor, the Chief Secretary to the Treasury and our negotiators in Customs and
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Excise—that the House of Commons and United Kingdom representatives value our reduced and zero rates and that we will not yield on that point.
Mr. Kelvin Hopkins (Luton, North): I, too, welcome my right hon. Friend's robust defence of the British position, which I am sure we all support. However, in the documents, the Commission does not appear to have backed down to the British position yet. It says that the harmonisation of rates can be considered only in the long term. Does she know what the Commission might mean by the long term? Some people think that the long term means indefinitely. Keynes, for example, said,
''In the long run we are all dead.''
However, I suspect that the Commission is referring to a rather shorter term than that.
Dawn Primarolo: I have no idea what specific period the Commission had in mind when suggesting that harmonisation could be considered in the long term. The Government's position is that harmonisation of rates is not necessary—in the long term, short term or any term. However, we are prepared to examine the reduced rates for the employment experiment that was undertaken, and that was what we believed we would be doing when this proposal was initiated. The Government believe that that there is room for simplification and for tidying up the way in which the current—I believe that it is called interim—regime operates. However, we see no reason why the interim regime should come to an end. The arrangements are in place for the Commission to intervene on the question of single market justification, so we should proceed on the basis of the earlier proposals, as member states had understood, rather than of those currently under consideration.
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