Dated: 14 April 2011

The IoD today publishes its response to the European Commission’s green paper on the future of VAT. In particular, the IoD is concerned that the green paper heralds an attempt by the Commission to allow certain areas of VAT regulation to be decided by majority voting (i.e. no UK veto), and to eliminate certain reduced rates of VAT that apply in the UK.

Key points in the IoD response:

• Zero VAT rates must not be removed. There are several calls for standardization covering administrative rules, the VAT threshold and reduced rates (such as the UK’s zero rates). There is no recognition of the fact that the advantages of standardization may be outweighed by the disadvantages of preventing elected governments from adapting VAT to suit the circumstances of their own countries. The UK Government should oppose these proposals.

• UK tax affairs should not be determined by majority voting. The Commission has suggested there should be “Implementing decisions” to clarify what is meant by EU VAT directives and regulations. The Commission has also suggested that these would only need the approval of a majority of member states, not unanimous agreement. The IoD believes that abolishing vetoes is not the best way of giving greater clarity to VAT regulations. It is for officials to write better directives and regulations, and for governments to have a better focus on agreeing good VAT law.

• We are told by the Commission that VAT is ‘not’ a tax on businesses. But any increases in VAT reduce sales, directly harming businesses and their employees. VAT may technically be paid by consumers, with businesses only acting as a conduit for the money. But that ignores the economic reality. We are concerned that the Commission does not understand these basic concepts.

• On the positive side, there is a drive to reduce fraud and to reduce administrative burdens. The IoD supports that agenda.

Richard Baron, Head of Taxation at the IoD, commented:

“It is sensible for the Commission to stand back and take a long, hard look at the way in which VAT operates. It is a massive burden on businesses, and prone to fraud, so improvements are always welcome. But we must beware of any assault on national tax powers, or of any tendency to assume that the man in Brussels knows best. We hope that the UK Government will resist many of these proposals.”