Call to stop VAT plan that 'shows Europe does not understand'

THE Institute of Directors has called on the government to put its foot down on potential moves by the European Commission (EC) to radically increase VAT on items such as food, books and children's clothes.

The business group warned that the EC's green paper on the future of VAT could lead to proposals to harmonise rates across Europe, which would stop the UK from having reduced rates on certain items.

Most food, children's clothing, books, newspapers and public transport are "zero rated" - there is no VAT payable. Currently VAT on goods and services in the UK is 20 per cent, which the coalition government raised from 17.5 per cent in January.

Richard Baron, head of taxation at the IoD, said he was concerned that the EC would attempt to remove zero ratings in an effort to simplify tax across the EU.

Baron said: "They seem to be thinking this kind of way and we believe they should stop it.

"(The EC] is saying we have different ratings in different countries which is all rather messy. There is a subtext there that the man in Brussels knows best and we'll tidy everything up. That is what worries us.

"There is no recognition of the fact that the advantages of standardisation 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."

The EC paper, which is open to submissions until the end of May, is a first attempt to simplify VAT across Europe's 27 member states, which could lead to a new directive being proposed in 2012.

The commission's paper said that "the time has come" to look critically at the VAT system, 40 years after its introduction, with a view to "strengthening its coherence within the single market (and] its capacity as a revenue raiser by improving its economic efficiency and robustness".

The EC estimates that as much as 12 to 20 per cent of VAT collected by member states is lost as a result of a number of factors, including fraud and tax avoidance.

The paper, published in December, added that VAT was a "consumption tax and not a tax on businesses".

But the IoD said this "ignores the economic reality" as the tax affects how much consumers spend.

"We are concerned that the commission does not understand these basic concepts," said Baron.

The IoD also warned that the EC paper proposes that decisions on VAT will require only the vote of a majority of states to go ahead rather than a unanimous vote.

"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," said Baron.But the business group put its support behind the EC's aims to reduce fraud and administrative burden of the tax.

But Baron added: "We must beware of any assault on national tax powers, or of any tendency to assume that the man in Brussels knows best."