EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 7.7.2008 
SEC(2008) 2191 
  
COMMISSION STAFF WORKING DOCUMENT 
 
accompanying the 
Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 2006/112/EC as regards  reduced rates of value added tax 
Summary of the Impact Assessment 
{COM(2008) 428 final} 
{SEC(2008) 2190} 
 
EN 2   EN This condensed text merely summarises the anal ysis which is contained in the full text, which 
is available only in the original language ve rsion and accordingly presented only with the 
English language version of the proposal. 
This report commits only the Commission's services  involved in its prepar ation and the text is 
prepared as a basis for comment and does not pr ejudge the final form of any decision to be 
taken by the Commission. 
Executive Summary 
On 5 July 2007 the Commission presented a Co mmunication to the Council and European 
Parliament on VAT rates othe r than standard VAT rates1. In the Communication, based on a 
study carried out by Copenhagen Economics2, the Commission took the view that a new legal 
framework for reduced VAT rate s should rationalise and simplify the present system, without 
excluding the possibility of  giving Member States more flexib ility to adopt reduced rates, in 
particular for locally supplied services. Th e purpose of the Communication was to open a 
broad debate on the future of reduced rates, taking into account the conclusions of the study. 
The Council debate has not yet settled the fundamental questions about simplifying and 
rationalising the overall framework or the imp acts and usefulness of reduced rates to achieve 
specific policy objectives. However, the Commi ssion faces some urgent questions regarding 
the introduction of new scope to apply redu ced VAT rates, which should be addressed 
promptly and/or for which it is felt there are su fficient grounds to include them in a legislative 
proposal already. Some technical adjustments are also needed. 
It is against this background th at the Commission decided to s ubmit an initial proposal in the 
summer of 2008 (agenda planni ng item 2008/TAXUD/002; CLWP 2008 priority initiative). 
Consequently, the scope of this proposal will be limited and will not include an in-depth review of the current basic VAT rate structure (one standard rate of at least 15% and two 
optional reduced rates of at least 5% which may be applied to a lim ited list of goods and 
services). Neither will it tackle the problem  of the numerous derogations granted from the 
general rates framework, nor the question of expanding the scope of reduced rates for 
environmental purposes. This possible action is left  to a later stage, when the current in-depth 
debate and further study work has finished. 
This situation calls for a proportionate impact assessment strictly focusing on the following 
problems to be dealt with in the short term.   
(1) For certain labour-intensive services laid down in Annex IV to the VAT Directive 
(2006/112/EC), Member States can temporar ily apply reduced rates provided they 
have been authorised to do so. The provi sion concerned expires at the end of 2010. 
                                                 
1 COM (2007)380 final, available at: 
http://ec.europa.eu/taxation_customs/resources/doc uments/taxation/vat/how_vat_works/rates/COM(200
7)380_en.pdf . 
2 “Study on reduced VAT applied to goods and servi ces in the Member States of the European Union” 
Copenhagen Economics, 21 June 2007. See EUROPA — Taxation and Customs Union / Rates  and 
SEC(2007) 910, available at: 
http://ec.europa.eu/taxation_customs/resources/docum ents/taxation/vat/how_vat_works/rates/SEC(2007
)910_en.pdf . 
 
EN 3   EN The first question is whether the option of applying reduced rates should be made — 
wholly or partially — permanent or  should be abolished altogether. 
(2) A logical second question is whether Member  States’ licence to apply reduced rates 
should be extended to se rvices similar to labou r-intensive services th at are not listed in 
Annex IV, where there is no impact on the inte rnal market. The basic characteristics of 
such “locally supplied services” are that th ey cannot be supplied from a distance, are 
largely directed to local final consumers, and the supplier and cust omer are located in 
the same small area.  
(3) Restaurant services are generally considered to be one kind of locally supplied service 
as they are largely directed at the local ma rket. However, there might potentially be an 
internal market distortion in border regions  or for the distribu tion of tourism among 
certain Member States, because of differences in VAT rates applied in the Member States. Moreover — because of derogations — a large number of Member States have 
the right to apply reduced rates to restaura nt services, while ot hers do not. Some of 
these derogations will end on 31 December 2010. A third question thus arises: should 
all Member States be authorised to appl y reduced rates to restaurant services? 
(4) Currently, Member States are allowed to apply a reduced rate to the “provision, 
construction, renovation and alteration of  housing, as part of a social policy”. 
However, experience has shown that Member States interpret this in different ways. Moreover, some Member States apply a redu ced rate to the “renovation and repairing 
of private dwellings, excluding materials wh ich account for a significant part of the 
value of the service supplied” (in the list of  labour-intensive services in Annex IV) and 
a number of Member States have been gr anted derogations allowing them to apply 
reduced rates (or a zero rate) to supplies re lating to buildings re gardless of social 
policy. Some of these derogations expire at  the end of 2010. Conse quently, the fourth 
question is whether there are grounds to a llow reduced rates more generally for this 
sector and add the whole housing sector to the list of goods and services eligible for a 
reduced rate. In this way, Me mber States could choose to restrict the scope of the 
reduced VAT rate or not, according to thei r national budgetary and fiscal choices. 
The problems identified mainly relate to political constraints
. First, a large number of Member 
States ask for flexibility to set reduced rates as they see fit in areas where the internal market 
is not affected by differ ences in rates between Memb er States. Second, the unequal 
possibilities offered to the Member States in some of these areas are another part of the 
problem. Here we refer only to reduced VAT ra tes. The impact assessment does not discuss 
whether reducing direct taxation and social secu rity contributions might be more appropriate 
to achieve certain employment objectives. Neither  does it discuss broader issues such as the 
balance between indirect and direct taxation.  
The objectives  of the forthcoming Commission ini tiative on reduced VAT rates are the 
following. 
(1) The first is to create a level playing field in  the Union for all Member States as regards 
applying reduced rates to restaurant services , locally supplied services and services 
relating to housing (and similar non-commercial buildings) and to create a more coherent VAT rates structure in this field. The objective is to give all Member States 
room for policy manoeuvre and assure flexib ility in such areas where the proper 
functioning of the internal market is not affected. 
 
EN 4   EN (2) Second, the policy should reduce legal an d economic uncertainty. At present, 
economic operators are uncertain about the fu ture of reduced rates applied to labour-
intensive services. Moreover, discussions on extending reduced ra te possibilities to 
restaurants and local services  have been ongoing for year s, creating uncertainty and 
possibly holding business back from investing and recruiting workers. 
(3) Third, there are social-economic objectives:  
(a) to reduce compliance costs for business, notably in the housing sector — this 
ties in with the second objectiv e of ensuring legal certainty; 
(b) to bring about a shift fr om the black and informal economy to the formal 
economy, so as to encourage economic growth and formal recruitment/employment and — to a lim ited extent — overall employment, by 
reducing do-it-yourself (DIY ) activity by households and helping to curb black 
activity for certain services. 
In the light of the above problem definition and objectives, the policy options
 are by 
definition very limited. 
(1) The first is “no policy change”. Under th is option the temporar y provisions of the 
VAT Directive allowing reduced rates for certain labour-intensive services would 
automatically expire by the end of 2010, as  would the temporary derogations granted 
to the new Member States to apply reduced rates to restaurants and the housing sector. 
The same derogations granted to old Member States would continue to apply, as they 
have no deadline. Member States that curr ently apply reduced rates to certain labour-
intensive services or new Member States applying derogations to the restaurant and 
housing sector would (in princi ple) have to incr ease the VAT rate for them to the 
standard rate.  
(2) The second option implies policy change and entails changing Community VAT 
legislation on reduced rates . Different sub-options can be  envisaged; these could go 
from a limited change in the legislation to  the widest possible change in accordance 
with the different issues refe rred to in the problem defi nition. In order of increasing 
magnitude, the change could encompass the following options (different aspects can 
also be considered separately): 
(a) Reduced rates for certain labour-intensive services: the only ch ange is to make 
the current provision on reduced rates for certain labour-intensive services 
permanent. 
(b) Reduced rates for an extended list of labour-intensive services: 
– for private households only: all Me mber States could apply reduced 
rates to Annex IV categories of serv ices and to a limited list of similar 
(small) services for private househ olds: gardening, or landscaping and 
maintenance of gardens for privat e households, personal care services 
other than hairdressing (service s provided in personal grooming 
establishments), minor repair of tangible movable property (excluding 
motor vehicles), and cleaning servi ces relating to tangible movable 
property; 
 
EN 5   EN – for private households and other non -commercial customers: the limited 
list of similar (small) services additionally could include services provided to final consumers other th an private households: gardening, 
landscaping and maintenance of gardens and parks for public authorities and non-commercial use, (small) renovation, repair, maintenance and cleaning of places  of worship, cultural heritage, 
historical monuments or ot her non-commercial buildings. 
(c) Reduced rates for an extende d list of labour-intensive services and restaurant 
services: Member States could also appl y reduced rates to restaurant services. 
(d) Reduced rates for an extended list of labour-intensive services, restaurants 
services and the complete housing sect or: Member States could also apply 
reduced rates to the construction and (significant) alteration of private dwellings and to the supply of thereof. 
(e) Reduced rates for an extended list of labour-intensive services, restaurant 
services, the housing sector, and certai n other parts of the building sector: 
Member States could also apply reduc ed rates to the construction and 
significant renovation or alteration of non- commercial buildings, such as places 
of worship or cultural heritage, histor ical monuments or other non-commercial 
buildings and to the supply thereof. 
The impact assessment for these options is mainly based on the conclusions of the 
Copenhagen Economics study. However, other data sources were also c onsulted. In parallel 
with the present impact assessm ent a public consultation took place from 11 March to 12 May 
2008. Generally, the consultation did not reveal argum ents not covered by or relevant to this 
impact assessment. 
In all policy change options the sectors
 affected by the change are likely to experience 
demand and employment  boosts; differences between sectors seem to depend largely on price 
sensitiveness, which may be somewhat weaker  in the construction sector (maintenance, 
repair, and building) and where services are not  supplied to households . The strongest effects 
are likely to be observed in options 2, 3 and 5  in Table 1. There might be differences between 
the Member States as regards the timing of  the impact, depending on the rigidness and 
tightness of the relevant labour market. The no- policy-change option would mainly increase 
the VAT rate for certain labour-intensive sectors in the Member States applying reduced rates to these services. The increase in VAT rates is  likely to have greate r effects (in the opposite 
direction) than a reduction.  
The reduced rates envisaged in the policy change options are likely to be most effective in 
terms of countering the black economy
, in sectors serving fina l consumers, especially 
households. (i.e. in options 2, 3, 5 and 6  in Table 1). The no-policy- change option is likely to 
lead to increased activity in the black economy.  
As regards legal and economic certainty , policy change options  which clearly and 
permanently set out the scope for Member States  to apply reduced rate s to labour-intensive 
services and restaurant services ( options 2, 3 and 5  in Table 1) would improve the situation. 
The no-policy-change option would also offer cer tainty by excluding further extensions of 
temporary measures (especially as regards certain labour-intensive services), but, as 
derogations (for example for rest aurant services) would still be  in place, the discussion on 
 
EN 6   EN extending reduced rates to loca lly supplied services and rest aurants would not be over and 
would leave room for uncertainty.  
Overall economic growth  is likely to be more significant in the policy options ( options 2, 3 
and 5  in Table 1) where a shift oc curs from do-it-yourself and bl ack economy activities to the 
formal economy (activities with limited need for formal training and specialised machinery), 
i.e. locally supplied se rvices for households, especially dom estic care, cleaning, small repairs 
and maintenance, and restaurants. Overal l reduction of (structural) unemployment  is likely to 
be almost non-existent in all policy options, except where reduced rate s are introduced for 
services for households involving a relatively high  share of low-skilled wo rkers, such as small 
repairs and maintenance, cleaning and restaurant  services. The strongest  effect is likely to 
occur in options 2, 3 and 5  in Table 1. However, as regard s overall growth and employment, 
impact differences between Member States need to be taken into account.  
The different policy options are not expected to  have a significant impact on compliance costs 
for business , unless reduced rates are introduced for the whole housing sector and for 
restaurants ( options 2+6 and 5  in Table 1). 
Moreover, none of the policy op tions is likely to have signifi cant impacts on the functioning 
of the internal market . Reduced rates for restaurants and services in personal grooming 
establishments might have impacts in border re gions or on tourism but, generally speaking, 
compared to the current situation (and the no-pol icy-change option), the internal market might 
work better if all Member States have e qual opportunities to in troduce reduced rates. 
Because all the sectors affected by the pol icy change options are dominated by SMEs , all of 
these options which boost activity in these sectors are — to varying extents — likely to have beneficial effects on SMEs.  
In terms of environmental effects
, options allowing reduced rates in the building sector 
(options 2, 4, 6 and 7 ) are likely to have mo st beneficial impact.  
Impacts on income distribution between households  are likely to be non-existent or minor in 
all options. Some wellbeing effects are to be expected in all policy change options and 
positive impacts on social integration  are possible where, overall , more employment of low-
skilled workers is likely ( options 2 to 5 ). 
 
EN 7   EN Table 1: Comparing the impacts of the policy options (additional parts of options 
considered)  
Impacts 
 
Options 
Sector growth 
Growth overall 
economy 
Sector 
employment 
Employment. 
Overall 
Black economy 
Compliance cost 
Internal market 
SMEs 
Income 
distribution 
Other social 
Environ-mental 
1. No policy 
change - - - -/0 - 0 0 - 0 - - 
2. Reduced 
rates (RR) for 
certain 
labour-
intensive 
services (LIS) +++ +++ +++ +/0 +++ 0 0 ++ 0 ++ + 
3. RR for an 
extended list 
of LIS for 
private 
households 
only +++ +++ +++ + +++ 0 0 ++ 0 ++ 0 
4. RR for an 
extended list 
of LIS for 
other non-
commercial 
customers + +/0 + 0 +/0 -/0 0 + 0 ++ + 
5. RR for 
restaurant 
services  +++ +++ +++ ++ +++ + + ++ 0 ++ 0 
6. RR for 
significant 
works/supply 
in the housing 
sector ++ +/0 ++ 0 +++ + 0 ++ 0 + + 
7. RR for significant 
works/supply 
of non 
commercial 
buildings + +/0 + 0 +/0 -/0 0 + 0 + + 
As to compliance with the objectives (Table 2) , the no-policy-change option does not meet the 
objectives set, except for a possible small im pact on compliance burdens. Indeed, numerous 
derogations for reduced rates in the restaurant  and housing sector would still be in place. 
The policy change options all meet the first objective; options 2, 3, and 6  meet all but one 
objective, while option 5  meets all objectives. 
 
EN 8   EN Table 2: Comparing compliance with  the objectives of policy options  
Objectives 
 Options Level playing 
field in EU as 
regards RR for 
restaurants, 
housing and LSS 
and flexibility 
for MS where no 
internal market 
impact Reduction of 
legal and 
economic 
uncertainty Reduction of 
compliance costs Shift from black 
and informal 
economy to 
formal economy 
1. No policy 
change  no no minor no 
2. Reduced rates 
(RR) for certain 
LIS- Annex IV  yes yes no yes 
3. RR for an 
extended list of 
LIS for private 
households only  yes yes no yes 
4. RR for an 
extended list of 
LIS for other 
non-commercial 
customers  yes no no minor 
5. RR for 
restaurant 
services  yes yes yes yes 
6. RR for 
significant works 
and supply in the 
housing sector  yes no yes yes 
7. RR for 
significant works 
and supply of 
non-commercial 
buildings  yes no no minor 
Without taking account of the budgetary im pacts on Member States, which, given the 
principle of flexibility, are for them to assess in the firs t place, overall preference goes to 
options 2, 3, 5 and 6 , which could be combined.