EU plans tax cuts for local firms

The European Commission has unveiled plans to allow EU states to lower VAT rates for local service businesses, including restaurants and builders.

The 27 member states will be able to apply lower value added tax to all housing services - from construction to cleaning - if the proposal is adopted.

Currently the minimum standard rate of VAT in the EU is 15%, although there are many derogations and exemptions.

The Commission believes the new rates will also help boost energy efficiency.

The proposal covers home improvements carried out to increase energy efficiency, such as installation of thermal insulation and double glazing.

The proposal scraps a current restriction whereby member states can only apply reduced VAT rates for labour-intensive services in a maximum of two sectors.

Standardising rates

EU Tax Commissioner Laszlo Kovacs said he wanted to "provide certainty about the application of reduced rates beyond 2010 for labour-intensive sectors and provide all member states with the same options".

"There is no reason why restaurant services, for example, should be allowed to benefit from a reduced rate in one half of the European Union but not in the other half."

The proposal requires the unanimous agreement of member states to become law.

The main locally supplied services included in the proposal are:

* All housing services, notably construction, maintenance and cleaning

* Restaurant and catering services, excluding alcoholic beverages

* Domestic care services, such as home help for the elderly

* All personal care services, such as hairdressing, beauty treatments

* Gardening

* Repairs of consumer goods, including bikes, computers, clothes.

The normal minimum VAT rate across the EU is 15%, but states can apply lower rates of not less than 5% to goods and services on a restricted list.

Yet there is huge variation in VAT rates across the EU. For example, a reduced rate applies to restaurant services in 11 states, but not in the other 16.

For years France has been calling for the rate for restaurant services to be slashed EU-wide.

France and the UK have also been urging the EU to cut VAT rates on energy-efficient home appliances.

Mr Kovacs said a wider proposal on environmentally friendly taxation was under review.

According to the Commission, the current proposal should encourage economic growth and shift more work from the do-it-yourself and black economy areas to the formal economy.

The Commission says cutting VAT in locally supplied services will not disrupt the proper functioning of the EU's internal market.