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}
Date: 2008-07-07
Institutions: European Commission
Subjects: VAT, basis of tax assessment, delivery, distributive trades, provision of services, tax exemption, tax harmonisation, tax on consumption, tax relief

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COMMISSION OF THE EUROPEAN 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} 

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This condensed text merely summarises the analysis which is contained in the full text, which 
is available only in the original language version and accordingly presented only with the 
English language version of the proposal. 

This report commits only the Commission's services involved in its preparation and the text is 
prepared as a basis for comment and does not prejudge the final form of any decision to be 
taken by the Commission. 

Executive Summary 

On  5  July  2007  the  Commission  presented  a  Communication  to  the  Council  and  European 
Parliament on VAT rates other 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 rates should rationalise and simplify the present system, without 
excluding the possibility of giving Member States more flexibility to adopt reduced rates, in 
particular  for  locally  supplied  services.  The  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 impacts and usefulness of reduced rates to achieve 
specific policy objectives. However, the Commission faces some urgent questions regarding 
the  introduction  of  new  scope  to  apply  reduced  VAT  rates,  which  should  be  addressed 
promptly and/or for which it is felt there are sufficient grounds to include them in a legislative 
proposal already. Some technical adjustments are also needed. 

It is against this background that the Commission decided to submit an initial proposal in the 
summer  of  2008  (agenda  planning  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  limited  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  temporarily  apply  reduced  rates  provided  they 
have  been  authorised  to  do  so.  The  provision  concerned  expires  at  the  end  of  2010. 

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2 

COM (2007)380 final, available at: 
http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/rates/COM(200
7)380_en.pdf. 

“Study on reduced VAT applied to goods and services 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/documents/taxation/vat/how_vat_works/rates/SEC(2007
)910_en.pdf. 

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(2) 

(3) 

(4) 

The first question is whether the option of applying reduced rates should be made — 
wholly or partially — permanent or should be abolished altogether. 

A  logical  second  question  is  whether  Member  States’  licence  to  apply  reduced  rates 
should be extended to services similar to labour-intensive services that are not listed in 
Annex IV, where there is no impact on the internal market. The basic characteristics of 
such “locally supplied services” are that they cannot be supplied from a distance, are 
largely directed to local final consumers, and the supplier and customer are located in 
the same small area.  

Restaurant services are generally considered to be one kind of locally supplied service 
as they are largely directed at the local market. However, there might potentially be an 
internal  market  distortion  in  border  regions  or  for  the  distribution  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  restaurant  services,  while  others  do  not.  Some  of 
these derogations will end on 31 December 2010. A third question thus arises: should 
all Member States be authorised to apply reduced rates to restaurant services? 

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 reduced rate to the “renovation and repairing 
of  private  dwellings,  excluding  materials  which  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  granted  derogations  allowing  them  to  apply 
reduced  rates  (or  a  zero  rate)  to  supplies  relating  to  buildings  regardless  of  social 
policy. Some of these derogations expire at the end of 2010. Consequently, the fourth 
question  is  whether  there  are  grounds  to  allow  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,  Member  States  could  choose  to  restrict  the  scope  of  the 
reduced VAT rate or not, according to their 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  differences  in  rates  between  Member  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 rates. The impact assessment does not discuss 
whether reducing direct taxation and social security 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  initiative  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  flexibility  in  such  areas  where  the  proper 
functioning of the internal market is not affected. 

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(2) 

Second,  the  policy  should  reduce  legal  and  economic  uncertainty.  At  present, 
economic operators are uncertain about the future of reduced rates applied to labour-
intensive  services.  Moreover,  discussions  on  extending  reduced  rate  possibilities  to 
restaurants  and  local  services  have  been  ongoing  for  years,  creating  uncertainty  and 
possibly holding business back from investing and recruiting workers. 

(3) 

Third, there are social-economic objectives:  

(a) 

(b) 

to reduce compliance costs for business, notably in the housing sector — this 
ties in with the second objective of ensuring legal certainty; 

so 

to  bring  about  a  shift  from  the  black  and  informal  economy  to  the  formal 
formal 
economy, 
recruitment/employment and — to a limited extent — overall employment, by 
reducing do-it-yourself (DIY) activity by households and helping to curb black 
activity for certain services. 

encourage 

economic 

growth 

and 

as 

to 

In  the  light  of  the  above  problem  definition  and  objectives,  the  policy  options  are  by 
definition very limited. 

(1) 

(2) 

The  first  is  “no  policy  change”.  Under  this  option  the  temporary  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 currently apply reduced rates to certain labour-
intensive  services  or  new  Member  States  applying  derogations  to  the  restaurant  and 
housing  sector  would  (in  principle)  have  to  increase  the  VAT  rate  for  them  to  the 
standard rate.  

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  referred  to  in  the  problem  definition.  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 change 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  Member  States  could  apply  reduced 
rates to Annex IV categories of services and to a limited list of similar 
(small)  services  for  private  households:  gardening,  or  landscaping  and 
maintenance  of  gardens  for  private  households,  personal  care  services 
other  than  hairdressing  (services  provided  in  personal  grooming 
establishments),  minor  repair  of  tangible  movable  property  (excluding 
motor  vehicles),  and  cleaning  services  relating  to  tangible  movable 
property; 

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– 

for private households and other non-commercial customers: the limited 
list  of  similar  (small)  services  additionally  could  include  services 
provided  to  final  consumers  other  than  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 other non-commercial buildings. 

(c) 

(d) 

(e) 

Reduced  rates  for  an  extended  list  of  labour-intensive  services  and  restaurant 
services: Member States could also apply reduced rates to restaurant services. 

Reduced  rates  for  an  extended  list  of  labour-intensive  services,  restaurants 
services  and  the  complete  housing  sector:  Member  States  could  also  apply 
reduced  rates  to  the  construction  and  (significant)  alteration  of  private 
dwellings and to the supply of thereof. 

Reduced  rates  for  an  extended  list  of  labour-intensive  services,  restaurant 
services,  the  housing  sector,  and  certain  other  parts  of  the  building  sector: 
Member  States  could  also  apply  reduced  rates  to  the  construction  and 
significant renovation or alteration of non-commercial buildings, such as places 
of worship or cultural heritage, historical 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 consulted. In parallel 
with the present impact assessment a public consultation took place from 11 March to 12 May 
2008. Generally, the consultation did not reveal arguments 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 greater 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  final  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  rates  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  certainty  by  excluding  further  extensions  of 
temporary  measures  (especially  as  regards  certain  labour-intensive  services),  but,  as 
derogations  (for  example  for  restaurant  services)  would  still  be  in  place,  the  discussion  on 

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extending  reduced  rates  to  locally  supplied  services  and  restaurants  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 occurs from do-it-yourself and black economy activities to the 
formal economy (activities with limited need for formal training and specialised machinery), 
i.e. locally supplied services for households, especially domestic care, cleaning, small repairs 
and maintenance, and restaurants. Overall reduction of (structural) unemployment is likely to 
be  almost  non-existent  in  all  policy  options,  except  where  reduced  rates  are  introduced  for 
services for households involving a relatively high share of low-skilled workers, 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 regards 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 options is likely to have significant impacts on the functioning 
of  the  internal  market.  Reduced  rates  for  restaurants  and  services  in  personal  grooming 
establishments  might  have  impacts  in  border  regions  or  on  tourism  but,  generally  speaking, 
compared to the current situation (and the no-policy-change option), the internal market might 
work better if all Member States have equal opportunities to introduce reduced rates. 

Because all the sectors affected by the policy 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 most 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). 

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Table  1:  Comparing  the  impacts  of  the  policy  options  (additional  parts  of  options 
considered) 

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Impacts 

Options 

1.  No  policy 
change 

2.  Reduced 
rates (RR) for 
certain 
labour-
intensive 
services (LIS) 

3.  RR  for  an 
list 
extended 
of  LIS 
for 
private 
households 
only 

4.  RR  for  an 
list 
extended 
for 
of  LIS 
other 
non-
commercial 
customers 

for 

5.  RR 
restaurant 
services  

for 

6.  RR 
significant 
works/supply 
in the housing 
sector 

for 

7.  RR 
significant 
works/supply 
non 
of 
commercial 
buildings 

As to compliance with the objectives (Table 2), the no-policy-change option does not meet the 
objectives set, except for a possible small impact 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. 

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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 

of 
and 

Reduction 
legal 
economic 
uncertainty 

of 
Reduction 
compliance costs 

Shift  from  black 
informal 
and 
economy 
to 
formal economy 

1.  No 
change 

policy 

2.  Reduced  rates 
(RR)  for  certain 
LIS- Annex IV 

for  an 
3.  RR 
extended  list  of 
LIS  for  private 
households only 

for  an 
4.  RR 
extended  list  of 
LIS 
for  other 
non-commercial 
customers 

for 

5. 
RR 
restaurant 
services  

6. 
for 
RR 
significant works 
and supply in the 
housing sector 

7. 
for 
RR 
significant works 
and 
supply  of 
non-commercial 
buildings 

no 

yes 

yes 

no 

yes 

yes 

minor 

no 

no 

no 

yes 

yes 

yes 

no 

no 

minor 

yes 

yes 

yes 

no 

yes 

yes 

yes 

yes 

yes 

no 

no 

minor 

Without  taking  account  of  the  budgetary  impacts  on  Member  States,  which,  given  the 
principle  of  flexibility,  are  for  them  to  assess  in  the  first  place,  overall  preference  goes  to 
options 2, 3, 5 and 6, which could be combined. 

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