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European proposals on VAT raise concerns

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Plans by the European Commission to drop certain reduced rates of VAT have been criticised by the Institute of Directors (IoD).

As well as proposing the abolition of some reduced rates – the IoD cited the possible threat to the zero rate that applies to children’s clothing in the UK – the EC green paper on the future of VAT across Europe also put forward the idea that VAT regulation be decided by majority member state voting.

Some reduced rates could be endangered by the EC’s call for standardisation, the IoD said in response to the green paper.

The business group defended the zero rate, saying that one of the disadvantages of standardisation across the EU on issues of VAT thresholds and reduced rates was that it would prevent individual governments from adapting VAT to suit the circumstances of their own countries.

The IoD also opposed a proposal that clarification of VAT directives and regulations should be approved only with a majority vote of EU member states rather than by unanimous agreement. In effect, this would mean the end of the UK’s veto.

Abolition of the veto would not, in the IoD’s view, provide greater clarity on VAT regulations and would involve a weakening of the UK’s ability to decide its own tax measures.

The IoD did, however, welcome the paper’s drive to reduce fraud and to reduce administrative burdens.

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.”