Finance ministers delay decision on reducing VAT on labour-intensive services

EU finance ministers expressed doubts in February 1998 about the effectiveness and feasibility of operating a reduction of VAT on labour-intensive services, as proposed by the European Commission in the context of the November 1997 Luxembourg Jobs Summit. The dossier was returned to a group of experts for further examination.

At a meeting in Brussels on 16 February 1998, the EU Economic and Financial Affairs Council of Ministers expressed their doubts over the real impact on employment of a reduction of value-added tax (VAT) on labour-intensive services. This proposal was included in a Communication from the European Commission (EU9711161N) drawn up in preparation for the special European Council Jobs Summit held in Luxembourg in November 1997 (EU9711168F). The Commission document examined the scope for Member States to reduce the rate of VAT levied on a limited number of labour-intensive local services, such as repair services, the renovation and repair of buildings, theme parks, cleaning and laundry services, home helps and care for children, disabled and older people. It was suggested that a reduction of VAT could be applied in very limited number of cases in order to test the job-creation potential of such measures, particularly for low-skilled and long-term unemployed individuals. Calls for a reduction of VAT on labour-intensive services were voiced by the social partners representing workers in the cleaning industry at a seminar held in October 1997 to discuss new employment opportunities in the sector (EU9710153F).

At February's first policy debate on the Commission's proposals, ministers opted to return the dossier to a group of experts, suggesting that it will be some time until the issue will obtain the backing of the Council.

From the beginning, a number of Member States, including Germany, Austria, Greece and Denmark, had voiced strong reservations against such measures on the grounds that a reduction of VAT on certain services would lead to calls from others sectors to benefit from the same inducements, thus making it difficult to restrict them. The proposal is also viewed as going against the grain of attempts to harmonise tax regimes EU-wide, and it is feared that such measures would have severe budgetary implications which have so far been insufficiently considered.

Finance ministers have therefore asked a group of experts to assess in more detail: the impact of such a derogation from the 6th VAT Directive; how to limit the budgetary impact of such a measure; a clearer identification of the services where the link between a reduction in price and an increase in demand in strongest; and how to restrict the measure to local services in order to minimise distortions of competition in cross-border trade.