EU considering VAT rise on Irish goods

THE European Union is considering proposals to introduce VAT to certain consumer goods in Ireland, including children’s shoes and clothes.

The cost of food, transport, books, and other services could increase dramatically under proposals to simplify VAT rates across the EU. There is zero VAT in Ireland on all those items.

However, the European Commission has been asked to come up with proposals to simplify the range of VAT rates across the EU.

Ireland has one of the highest standard VAT rates in the EU at 21%, which applies to most goods, while the reduced rate of 13.5% is applied to hotels, restaurants, hairdressers, vehicle repairs and cultural events.

EU member countries have a long-standing agreement that the VAT rate should be between 15% and 25%, with a reduced rate of no less than 5% on a limited range of items.

But every country has opt-outs from this, including Ireland with its zero and super-reduced rate of 4.4%.

The old EU 15 countries have no time limit on these exemptions but the opt-outs given to the 12 new member states are due to run out later this year or next year when they will be forced to increase their VAT rates.

Tax commissioner Laszlo Kovacs said the time has come for governments to agree on reforms to the VAT system to remove any discrimination against newer member states and to ensure cross-border trade is not handicapped.

“A new framework for reduced rates is needed: more rational, more transparent and more flexible for the member states,” he said.

Mr Kovacs said he understood the issue was a very sensitive political one for many countries but they needed to be ready to compromise on it, as any deal would need all member states to agree.

The results of a study carried out by an independent Danish think-tank, Copenhagen Economics, show that from an economic perspective a single uniform VAT rate per member state is the best policy choice.

But having a reduced rate on goods in carefully chosen areas could also be useful if it persuaded consumers to spend more on such goods and services, the report said.

Mr Kovacs said he would not suggest specific rates at this stage, as he wanted to launch a broad debate on the VAT issue between stakeholders and member states, but he also wanted to maintain the current two- rate system with the lower rate of not less than 5% applicable to essential goods, food and pharmaceuticals.

His spokesperson Maria Assimakopoulou said all rates, including Ireland’s zero rate, were on the table for discussion.

The Department of Finance was studying the report but pointed out that Ireland, like other member states, has a veto on this issue.