The European Commission yesterday presented its proposals to "rationalise and simplify" reduced and zero VAT rates as part of a wider agenda to harmonise this type of taxation to stimulate the European single market.
A series of optional cuts in VAT on products and services are floated, along with changes in rates on housing, gas and electricity in the different member-states. Children's clothes and shoes in Ireland and Britain would no longer be taxed at zero rates if the proposals were adopted.
Both governments have made it clear that they will not accept this, so the proposals will be stillborn. It is puzzling, therefore, why they have been made in this form at this stage.
The Commission has long had the ambition to rationalise VAT rates to stimulate competition and the single European market. It has had to deal with an inheritance of varying rates throughout the member-states, a resistance by governments to harmonise them unduly, and a vast array of derogations negotiated over the years. It is fearful of the knock-on effect of these as the EU enlarges so dramatically next year to take in 10 more states, and presumably it has calculated that it is better to get this reform under way before that happens and ahead of the inter-governmental conference later this year.
One of the anomalies of the VAT system so far as the Commission is concerned is the zero-rating of children's clothes and shoes in Ireland and Britain. Its spokesmen say they are aware of the domestic political sensitivities involved. The minority Fine Gael/Labour coalition government collapsed in 1982 when Mr John Bruton, as Minister for Finance, proposed the imposition of VAT on children's shoes. The political memory of then Taoiseach, Dr Garret FitzGerald, imploring the late Mr Jim Kemmy on bended knee to vote with that Coaliton lingers in the Dáil. The British Labour government included a pledge to keep the zero-rating in its last election manifesto.
There is little incentive in these proposals for either government to bargain with the Commission. As they stand, they are not likely to survive the threatened vetoes from the Irish and British governments which are in any case hyper-sensitive about EU taxation policy, notably in the corporate area.
There are, nonetheless, some positive aspects in the Commission's case that should not be overlooked in the furore over zero-rating of children's clothing and shoes. Its research has found that the absence of VAT is not reflected in prices to the consumer. Thus shoes are only slightly more expensive in Denmark, with a 25 per cent rate, than in Britain and Ireland.
The Commission concludes, persuasively, that producers and retailers do not pass on the concession and that consumers do not benefit from it. Nor has it found convincing evidence that employment levels are affected by VAT rates.