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The harmonisation of VAT systems across Member States has been seen as an important part of achieving a Single European Market for many years. In October 1992 the European Council agreed Directive 92/77/EEC which established new rules limiting the discretion of all States to set VAT rates.  Member States must apply a standard VAT rate of 15% or more, and have the option of applying one or two reduced rates, no lower than 5% to certain specified goods (this list is now consolidated in Annex III to VAT Directive 2006/112/EC).  Member States may continue to charge any lower rates, including zero rates, that were in place on 1 January 1991, though they cannot introduce any new rate under 5%.  In October 1999 the Council agreed an amendment to these rules giving States the option to apply a reduced VAT rate to certain ‘labour-intensive’ services.  Any amendment to these rules – as with any VAT directive – must be agreed unanimously.

In July 2003 the European Commission published proposals for simplifying the EU rules on reduced VAT rates.[1]  From the UK’s perspective the proposals were controversial as they would not have allowed for certain zero rates to be maintained, including the zero rate on children’s clothing.  Other Member States also had strong objections, and a final agreement was only reached in February 2006: a minimalist package that allowed for existing reduced and zero rates to continue.[2]  In July 2008 the Commission suggested some additions to the list of goods and services eligible for reduced rates,[3] but the next year European Finance Ministers agreed to make just two minor changes.[4] No further changes have been made to these rules to date.

In April 2016 the Commission published its ‘VAT Action Plan’ for reforming the EU VAT system, including possible changes to the rules regarding VAT rates, and the treatment of cross border trade.[5] Specific proposals to reform the EU rules on VAT rates were published in January 2018 – in effect, to reverse the current approach:

  • In addition to a standard VAT rate of minimum 15%, Member States would now be able to put in place:
    • two separate reduced rates of between 5% and the standard rate chosen by the Member State;
    • one exemption from VAT (or ‘zero rate’);
    • one reduced rate set at between 0% and the reduced rates.
  • The current, complex list of goods and services to which reduced rates can be applied would be abolished and replaced by a new list of products (such as weapons, alcoholic beverages, gambling and tobacco) to which the standard rate of 15% or above would always be applied. To safeguard public revenues, Member States will also have to ensure that the weighted average VAT rate is at least 12%. The new regime also means that all goods currently enjoying rates different from the standard rate can continue to do so.[6]

In answer to a PQ at the time Treasury Minister Mel Stride welcomed the proposal, but made no commitment for any specific changes to the schedule of UK VAT rates, stating, “it is right that Member States have flexibility in applying VAT on different products” while adding, “the proposal will need to be discussed and unanimously agreed by the Member States.“[7]

There is no firm timetable for these proposals to be agreed, and there is considerable uncertainty as to their relevance for the UK’s discretion in setting VAT rates, given the outcome of the EU referendum and the Government’s decision in March 2017 to trigger Article 50 – the two-year period for the UK to leave the EU.[8]

To date the Government have not published any specific details as to the UK’s post-Brexit relationship with the EU on VAT, beyond stating its ambition for an agreement on “common processes and procedures” to avoid the need for any new VAT-related border controls on goods moving between the UK and the EU.[9] It has also confirmed that, under the draft Withdrawal Agreement concluded in November 2018, the UK would remain compliant with EU law, including VAT law, during the ‘transition period’ prior to the implementation of the new, yet to be negotiated, UK-EU partnership arrangements.[10] On the question of any possible changes to UK VAT rates in the future, Treasury Minister Mel Stride said, in answer to a PQ in September 2018, “while all taxes are kept under review, the application of further zero rates is strictly limited by EU law. Future VAT rules will depend on the outcome of negotiations with the EU. Any future decisions on VAT will continue to be taken as part of the normal Budget process.”[11]


[1]     COM (2003) 397 final, 23 July 2003

[2]     Directive 2006/18/EC of 14 February 2006

[3]     COM(2008) 428/3, 7 July 2008

[4]     Directive 2009/47/EC of 5 May 2009

[5]     European Commission press notice IP16-1022, 7 April 2016; see also Action Plan on VAT: Questions and Answers (MEMO16-1024), 7 April 2016.

[6]     European Commission press notice, VAT: More flexibility on VAT rates, less red tape for small businesses, 18 January 2018. The draft proposal is COM(2018) 20 final. Full details are on the Commission’s site.

[7]     PQ125204, 31 January 2018

[8]     For details see, Brexit timeline: events leading to the UK’s exit from the European Union, Commons Briefing paper CBP7960, 16 January 2019.

[9]     HM Government, The future relationship between the UK and the EU, Cm 9593, July 2018 p18

[10]    Letter from the Financial Secretary to the European Scrutiny Committee, “EU legislative proposals on VAT”, 5 December 2018

[11]    PQ169374, 10 September 2018; see also, PQ193519, 28 November 2018

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