Select Committee on European Communities Second Report


10.  REDUCED VAT RATE ON LABOUR INTENSIVE SERVICES (6110/99, COM(99)62)

Letter from Dawn Primarolo MP, Paymaster General, HM Treasury, to Lord Tordoff, Chairman of the Committee

  The above proposal was the subject of an Explanatory Memorandum dated 30 March and was cleared from scrutiny by the Committees in both Houses in April. Since then there have been lengthy discussions at EC level and I am writing to update you on developments.

  The proposal is to allow Member States to apply a reduced rate of VAT on an optional, experimental basis, to certain local, labour intensive services as a means of stimulating employment. Following examination at Council Working Group level, a number of amendments to the draft Directive have been suggested and incorporated into a revised text produced by the Finnish Presidency for discussion at the Committee of Permanent Representatives (COREPER) this week. The aim is to reach agreement in time for adoption of the measure at the meeting of EC Finance Ministers (ECOFIN) on 8 October. While there are still a number of outstanding issues and we do not yet have a final text, Member States will come under considerable pressure to agree the proposal urgently and I felt I should alert you now the revisions which are proposed.

  The key changes from the original proposal are set out in the Annex to my letter, The UK welcomes the majority of these. We support in particular the deletion of the clause providing for early termination of experiments by Qualified Majority Voting (QMV), about which we had considerable concerns. We also support the inclusion of a limited list of qualifying services in order to reduce the risk of competitive distortions. The UK was instrumental in suggesting an amendment giving Member States some flexibility in a start date for introduction of a reduced rate and we can accept the requirement for the Commission to produce an evaluation report at the end of the experimental period.

  Because of the timing of the EC discussions, a revised proposal is unlikely to be available for consideration by the Scrutiny Committee before a decision needs to be taken at ECOFIN. I do not intend that the UK should block adoption of the proposal and if a decision is required, I hope you can agree to the UK signalling its acceptance. I will of course report the outcome of this week's discussions as soon as possible.

8 October 1999

Letter from Lord Tordoff, Chairman of the Committee, to Dawn Primarolo MP, Paymaster General, HM Treasury

  Thank you for your letter of 8 October, bringing us up to date on developments with this proposal. We understand that political agreement was indeed reached at ECOFIN on the basis of the revised proposal. We should be glad to know whether the Government intends to take advantage of the revised provisions in the United Kingdom and if not, why not.

26 October 1999

Letter from Dawn Primarolo MP, Paymaster General, HM Treasury, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 26 October about the Government's position on a reduced rate of VAT for labour intensive services.

  Council Directive 1999/85/EC which provides for Member States to apply a reduced rate for a limited number of services was finally adopted on 22 October. As you are aware, the objective is to seek to boost employment and create job opportunities by stimulating demand through lower consumer prices. The Government believes however, that unemployment can be tackled more effectively in the UK by our targeted schemes to equip people with skills for work which were introduced in the last two Budgets.

  Any decision on the use of an experimental reduced rate in the UK can in any case only be taken by the Chancellor in the context of the next Budget. Member States wishing to participate in the experimental arrangements were required to notify the Commission by 1 November but, to preserve our options if the Chancellor were minded to apply a reduce rate, I wrote to Commissioner Bolkestein before the deadline explaining the UK's position and the difficulties posed by the constraints of the Budget cycle. I believe that the UK has therefore met the requirement of the new Directive to notify the Commission and that a proposal for approval of a UK application could be circulated later, should we decide to proceed.

  I hope this helps to clarify the position.

20 January 2000

Letter from Lord Tordoff, Chairman of the Committee, to Dawn Primarolo MP, Paymaster General, HM Treasury

  Thank you for your letter of 20 January, which Sub-Committee A considered at its meeting on 15 February. We note that the Government's reasons for not making use of the power to apply a reduced rate of VAT at present, and we shall be interested to know if the Government does decide to enter this experiment in the future. We have cleared document 5016/00, which authorises those countries which have applied to proceed with their experiments.

17 February 2000

Letter from Lord Tordoff, Chairman of the Committee, to Dawn Primarolo MP, Paymaster General, HM Treasury

  I wrote to you on 17 February, telling you that we had cleared document 5016/00, and that we should be interested to know if the Government decided in the future to make use of the provision enabling it to apply a reduced rate of VAT on labour intensive services. We have since seen press reports claiming that the Government intends to reduce VAT on converting derelict buildings, and we should be interested to know in due course whether it is intended that this should be done through this particular experiment.

15 March 2000

Letter from Dawn Primarolo MP, Paymaster General, HM Treasury, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 15 March 2000 about the Government's position on applying the experimental reduced rate of VAT for labour intensive services to the conversion of derelict buildings.

  In my letter of 20 January 2000 I explained that the objective of the experiment is to seek to boost employment and create job opportunities by stimulating demand through lower consumer prices. The Government does not intend to introduce the experimental reduced rate, believing that unemployment can be tackled more effectively in the UK by our targeted schemes to equip people with skills for work.

  I hope this helps to clarify the position.

28 March 2000


 
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