House of Commons European Scrutiny Committee Thirty-first Report of Session 2002-03 Documents considered by the Committee on 10 September 2003, including: Reduced rates of VAT Recovery of Northern hake stock HC 63-xxxi House of Commons European Scrutiny Committee Thirty-first Report of Session 2002-03 Documents considered by the Committee on 10 September 2003, including: Reduced rates of VAT Recovery of Northern hake stock Report, together with formal minutes Ordered by the House of Commons to be printed 10 September 2003 HC 63-xxxi Published on 24 September 2003 by authority of the House of Commons London: The Stationery Office Limited £0.00 ESC, 31st Report, 2002-03 Notes Numbering of documents Three separate numbering systems are used in this Report for European Union documents: Numbers in brackets are the Committee’s own reference numbers. Numbers in the form ‘5467/03’ are Council of Ministers reference numbers. This system is also used by UK Government Departments, by the House of Commons Vote Office and for proceedings in the House. Numbers preceded by the letters COM or SEC are Commission reference numbers. Where only a Committee number is given, this usually indicates that no official text is available and the Government has submitted an ‘unnumbered Explanatory Memorandum’ discussing what is likely to be included in the document or covering an unofficial text. Abbreviations used in the headnotes and footnotes EC (in ‘Legal base’) Treaty establishing the European Community EM Explanatory Memorandum (submitted by the Government to the Committee) EP European Parliament EU (in ‘Legal base’) Treaty on European Union GAERC General Affairs and External Relations Council JHA Justice and Home Affairs OJ Official Journal of the European Communities QMV Qualified majority voting RIA Regulatory Impact Assessment SEM Supplementary Explanatory Memorandum Euros Where figures in euros have been converted to pounds sterling, this is normally at the market rate for the last working day of the previous month. Further information Documents recommended by the Committee for debate, together with the times of forthcoming debates (where known), are listed in the European Union Documents list, which is in the House of Commons Vote Bundle on Mondays and is also available on the parliamentary web–site. Documents awaiting consideration by the Committee are listed in ‘Remaining Business’: www.parliament.uk/parliamentary_committees/european_scrutiny.cfm. The web–site also contains the Committee’s Reports. Contacts All correspondence should be addressed to the Clerk of the European Scrutiny Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 3292/5465. The Committee’s e-mail address is [email protected] ESC, 31st Report, 2002-03 1 Contents Report Page Documents for debate 1 C&E (24783) Reduced rates of VAT 3 2 DEFRA (24692) Recovery of Northern hake stock 5 Documents not cleared 3 C&E (24790) Customs 8 4 DFID (24748) (24749) Operations financed under the decentralised cooperation Regulation 12 5 DOH (24316) European health insurance card 16 6 FCO (24741) Human rights and democratisation in the Mediterranean region 18 7 HO (24513) Carriers’ obligation to communicate passenger information 22 Documents cleared 8 C&E (19221) Reduced levy on New Zealand dairy imports 24 9 DEFRA (24166) Identification and registration system for sheep and goats 26 10 DFT (24727) Euro-Mediterranean transport network 28 11 DFT (24768) (24780) Single European Sky 30 12 DTI (24609) Company law 32 13 DTI (24659) Statutory audit in the European Union 34 14 DTI (24760) Implementation by the accession states of regional policy 37 15 DWP (24551) Protection of workers from risks arising from physical agents (electromagnetic fields and waves) 40 16 FSA (24798) Labelling of ingredients in foodstuffs 42 Documents not raising questions of sufficient legal or political importance to warrant a substantive report to the House 17 List of documents 45 Appendix 1: reports on Council meetings held during a recess 49 Formal minutes 53 Standing order and membership 54 2 ESC, 31st Report, 2002-03 ESC, 31st Report, 2002-03 3 1 Reduced rates of VAT (24783) Draft Council Directive amending Directive 77/388/EEC as regards 11817/03 reduced rates of Value Added Tax. COM(03) 397 Legal base Article 93 EC; consultation; QMV Document originated 23 July 2003 Deposited in Parliament 29 July 2003 Department HM Customs and Excise Basis of consideration EM of 29 August 2003 Previous Committee Report None To be discussed in Council Not known Committee’s assessment Politically important Committee’s decision For debate in European Standing Committee B Background 1.1 Member States are required to set a normal rate of VAT of at least 15%. At present there are three categories of allowable reduced rates of VAT. These are: • up to two reduced rates of at least 5% for a range of goods and services listed in Annex H to the Sixth VAT Directive; • experimentally, reduced rates for a small range of labour-intensive services listed in Annex K to the Sixth VAT Directive; • transitional derogations allowing Member States to retain zero rates or rates below 5% for specified goods and services or for particular regions or islands. 1.2 The Council is required to review, on the basis of a Commission report, reduced rates of VAT. The document 1.3 The Commission proposes a Directive to rationalise the system of reduced rates of VAT. It uses the explanatory memorandum for its draft also as the biennial report for the Council’s review of the system. 1.4 The Commission argues that the objective of the Community’s VAT system has been a simple, harmonised regime with a minimum normal rate of 15% and a minimum reduced rate of 5% for a very select group of goods and services to be used optionally (but widely) by Member States. It holds that if all goods and services were taxed at broadly the same rates throughout the EU, this would simplify the VAT system for businesses and remove any question of VAT rates distorting competition within the Single Market. The Commission sees no intrinsic value in the application of reduced rates as policy instruments and proposes that the use of reduced rates be rationalised. 4 ESC, 31st Report, 2002-03 1.5 The Commission proposes amending the Sixth VAT Directive so that: • Member States would be allowed to apply a VAT rate below the standard rate only to goods and services included in the Annex H list; • the provisions allowing Member States to retain their derogations would be abolished. Annex H would be expanded to provide coverage for those goods and services for which several Member States currently give relief under their derogations or under the labour-intensive services experiment, and would allow other Member States to follow suit. If not included in Annex H the standard rate of VAT would apply; • those Member States currently taxing goods and services on the Annex H list at rates below 5 percent would be allowed to continue doing so; and • the Annex H provisions would be reviewed every five years. 1.6 The proposed new Annex H list includes a number of new items, such as restaurant services, gas and electricity services, cut flowers and house repairs, providing coverage for reliefs currently applied in several other Member States. However, there is no coverage or inadequate coverage for a number of the reliefs currently applied under the UK’s transitional derogations, in particular for children’s clothing and footwear, and for a number of the zero rates benefiting charities and disabled people. The Government’s view 1.7 The Paymaster General (Dawn Primarolo) tells us: “Zero rates have been a fundamental part of the UK tax system since VAT was introduced in 1973, and many of them were translated directly from the old Purchase Tax, which preceded VAT. They save consumers in the UK around £20 billion each year, and they give the greatest benefit as a proportion of income to the lowest-income households. “As they stand, the Commission’s proposals make no provision or inadequate provision for the continued zero rating in the UK of children’s clothing and footwear, of several reliefs targeted at charities and disabled people, and of a number of other specific items. In total, they would add more than £1 billion of VAT to annual expenditure in the UK, with the biggest impact falling on low-income families, charities and disabled people. As the proposal stands the Government believes that there could be a damaging and regressive social impact of withdrawing reliefs on essential goods. “The Government therefore considers the proposals as they relate to zero rates unacceptable in their current form. The Government will not accept any proposals that would harm its social objectives or undermine the fairness of the UK’s VAT system. “The Commission’s approach to this review has significantly narrowed the scope to consider the introduction of new reduced rates. However, as well as defending our zero rates, the Government will continue to press its long-standing proposals for ESC, 31st Report, 2002-03 5 reduced rates on repairs to listed places of worship and on the purchase of energy saving materials for DIY installation.” Conclusion 1.8 This proposal would, as drafted, significantly limit the Government’s ability to apply a VAT system suited to the UK’s requirements. We note the Government’s intention to resist these unwelcome developments. We recommend that the matter be debated in European Standing Committee B so that Members can explore with Ministers how best to ensure drafting that retains the Government’s current ability to apply VAT flexibly. 2 Recovery of Northern hake stock (24692) Draft Council Regulation establishing measures for the recovery of 10980/03 the Northern hake stock.