EU to cut VAT and ease state aid for SMEs

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The Commission yesterday (7 July) proposed an overhaul of the bloc’s VAT and state aid policies to allow governments to reduce VAT rates for labour-intensive businesses and provide small business with more aid for risk capital and innovation.

The proposed taxation plans would allow all member states to apply a reduced VAT rate as low as 5% for a greater number of labour-intensive services, such as haircuts, house cleaning and renovation, vehicle repairs and catering in restaurants. 

The measures would also cover items such as childrens’ nappies and audio books, but do not apply to environmentally-friendly products such as efficient light-bulbs or less CO2-emitting cars. Proposals for a so-called ‘green tax’, which emerged from a joint British-Franco initiative last summer (EURACTIV 23/07/07  ) will nevertheless be included in a second package due in autumn, the Commission said. 

Currently, only 18 member states are allowed to apply a rate below the 15% standard for very limited sectors – with the EU’s newer members excluded from this possibility. Taxation Commissioner Laszlo Kovacs said he wants to harmonise these rules across the bloc and provide a “level playing field” until the end of 2010 when the current provisions expire. 

“There is no reason why restaurant services, for example, should be allowed to benefit from a reduced rate in one half of the European Union but not in the other half,” he said. The measures also aim to offer more flexibility for member states “without any real distortion,” he added. 

The initiative is likely to please France, the current holders of the EU Presidency, which has been lobbying other member states very hard since 2002 on getting their approval for a VAT rate of 5.5%, particularly for restaurant services. 

Kovacs said he expected the Parliament to approve the proposals next February or March, expressing his hope that they will be adopted by finance ministers next summer. But as changing the tax rules requires unanimity among all 27 member states, there is still a lot of negotiation required, especially to convince the more reticent Germans and Danes. 

Reducing VAT is also being eyed by French President Nicolas Sarkozy as a means of addressing soaring oil prices, but the move received a mixed reaction from his colleagues at the last EU summit. Sarkozy will nevertheless work with the Commission to further examine this option, he announced (EURACTIV 03/06/08). 

In parallel to the proposed VAT overhaul, the Commission also pledged to ease state aid requirements, a key part of the Small Business Act to promote SMEs presented on 26 June (EURACTIV 26/06/08).

Under the new rules, which go into effect within 20 days of their publication in the EU’s official journal (still foreseen for July), small businesses can receive investment aid of up to €7.5 million for a given project without having to notify the Commission. The initiative also aims to facilitate environmental protection projects and promote female entrepreneurship. 

SME federations strongly welcomed both initiatives. The proposed reduced VAT rate has the potential to boost local economies and could serve as an important tool in the fight against undeclared work, while the relaxed state aid rules “opens up new possibilities for aid providers across Europe to set up schemes that fully respond to the needs of SMEs,” UEAMPE said. 

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