TAXATION: DEAL ON REDUCED VAT RATES LIKELY BEFORE YEAR-END.

The European Commission has proposed to simplify the jungle of reduced VAT rates currently in force across the twenty-five EU nations. This is no easy task, since it will require complete unanimity of all 25 member states. To recap, the Commission's July 2003 proposal recommended scrapping "zero rates" and "super reduced rates" for categories of goods and services not covered by the Sixth VAT Directive. By the same token, the zero rate currently applied in the UK and Ireland on children's clothes and shoes is on the cards to be abolished. On the other hand, the Commission has proposed extending the scope of application of reduced VAT rates to certain categories of goods and services such as the catering industry (at France's request). The same goes for accommodation and gas and electricity supplies.

But there is one big hurdle to overcome. Ironically, as one expert explains, for some time now, at least five member states have expressed their "opposition to a generous solution for all". Germany, to begin with, has been dragging its heels since the beginning of the negotiations casting doubt on existing VAT rates (which could lead to a commensurate reduction in tax revenue). Germany incidentally has also been under attack from the Commission for failing to rein in its excessive public sector spending.

But the "end-of-year pressure" could change everything, explained one EU official. Time is running out, with the imminent repeal of Directive 1999/85/EEC authorising member states to reduce VAT rates for labour-intensive services (small repair works, private home renovation, hairdressers, window cleaners, etc.). This was an "experimental" Directive which has been applied on a voluntary basis in nine member states (Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal and the UK) since 2000. The initial "trial" period of two years has already been rolled over...