EU Commission to carry out review of rates

VAT on children’s clothes, the issue that infamously brought down a Fine Gael government, could soon be back on the agenda as the European Commission announces a review of all VAT rates.

Ireland has a range of low and zero VAT rates on goods and services that include food, heating, fuel and electricity, health and medical services, agriculture goods — and horses and greyhounds.

The current VAT regime across the EU is allows up to 12%, or €106 billion, of the take to disappear through fraud. This leads to extra costs for business and is interfering with a real open market in the EU, Tax Commissioner Algirdas Semeta has argued.

In fact, he said that if the system, which was more than 40 years old, was revised it could mean VAT rates decreasing without reducing the amount of money governments collect.

Every country has a list of derogations from the minimum VAT rate of 15%, and Ireland is no exception, with rates ranging from 0% to 4.8%, 9% and 13.5% as well as the top rate of 21%, which will soon be 23%.

VAT accounts for 21% of tax revenue and is worth €784bn in the EU. But with each country having a range of different rules and rates for goods, the cost to businesses is high and is a major obstacle to efficient intra-EU trade, said Mr Semeta.

“This is not about eliminating reduced rates and exemptions but going back to the drawing board and looking at what can be justified.”

The commission wants to standardise VAT declarations, have a one-stop-shop for cross-border transactions by 2015 and provide clear and easy access to details of all national VAT regimes through a central website.

With no success in streamlining VAT over the past 40 years, Mr Semeta said doing so now would be a long and difficult task.

“This is a long distance run, not a sprint. Any changes will be gradual and based on studies to avoid any risk to member states incomes. We want to bring in quality revenue, well protected against fraud, and today is a starting point for such improvements,” he said.

Work begins immediately, as the commission will also be analysing member states’ use of reduced rates and exemptions when reviewing their fiscal policies as part of the overall budget surveillance of the European semester.

In Ireland, there is zero VAT on all exports, tea, coffee, milk, bread, books, children’s clothes and shoes, oral medicine for humans and animals, vegetable seeds and fruit trees, fertilisers, large animal feed, live theatrical and music performances, disability aids such as wheelchairs, crutches and hearing aids.

There is a special reduced rate of VAT of 4.8% for agriculture including livestock and chickens. It also applies to greyhounds and the hire of horses — which the Government has been ordered to change as it says it has no clearly defined social reason and does not benefit the final consumer.

VAT is charged at 13.5% on fuel, veterinary fees, building and building services, agricultural contracting services, short-term car hire, cleaning and maintenance services.

In July, the Government introduced a special rate of 9% for 18 months on restaurants, hotels, cinemas, hairdressing and newspapers.