By Daniel Hunter

The European Commission last week launched a consultation on reduced VAT rates that could result in increased VAT on energy, water, drugs and medicines, and threaten the UK’s zero-rating on children’s clothing and books.

Part of the wider work being done to fundamentally reform the EU VAT system, the consultation gives strong hints on how the Commission would like to proceed.

“I believe there can be little doubt that the European Commission would like to abolish the reduced rates and this consultation is an interim measure following last year’s consultation on the future of VAT," Head of VAT Services Ruth Corkin from accountants and business advisers James Cowper explained.

"The use of the reduced rate looks to be particularly at risk where there is evidence there is distortion between member states due to lower rates of VAT, where the use of a lower rate discourages environmental policies or similar products are being taxed at different rates.

“The upheaval could be far reaching. It appears that the housing, energy and water industries are on the Commission’s radar on environmental grounds. Drugs, medicines and aids for disabled people could also become more expensive along with children’s clothing, if it’s decided they fall under the Commission’s distortion category due to internet sales.”

In some member states, the zero-rate on e-books, talking books and e-newspapers could be under threat and in the UK regular books, currently free from VAT may be at risk, not necessarily to the standard rate, but to a reduced rate overall.

“Whilst the argument continues as to what format a book can take, the UK has standard rated the provision of e-books, newspapers and magazines," Ruth explained.

"However, under the consultation it may be that a compromise will need to be reached and all reading media will become liable to a rate above zero in the UK.”

Ruth will be giving views on the consultation in her role of Chair of the VAT Practitioners Group (VPG) National Technical Committee and is co-ordinating a response on behalf of Kreston, one of the world’s largest accountancy and business advisory networks.

Respondents are asked in the consultation:

- whether any current reduced rate is distorting competition within the Single Market.
- if reduced rates for water, energy, waste management and housing contradict EU policy objectives, and
- how similar goods and services should be treated for VAT purposes, taking into account technological developments.

Ruth adds: “The Commission’s argument is the fact that Member States need new revenue sources, while businesses need simpler tax systems with fewer compliance costs. It believes that certain reduced VAT rates pose more problems than they are worth.”

The consultation will run until 3 January 2013 and its results will feed into the preparation of new proposals on VAT rates, which the Commission will present next year. If the Commission were to propose getting rid of one reduced VAT rate or another it would have to be unanimously endorsed by Member States before it could happen.

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