Briefings for Britain, September 20, Catherine McBride
The EU introduced VAT in 1967, to avoid distortion of cross-border shopping and trade and to provide itself with guaranteed income from member states (“Own Resources”). Every member state is required to contribute a fixed percentage of its VAT Base (items on which VAT is charged) to the EU’s budget. This creates a clear incentive for the EU to widen the VAT Base as much as possible in order to boost revenue. And the Commission is zealous in ensuring it gets a cut of tax on as many goods and services as possible: the ECJ’s caseload is full of VAT cases and arguments about obscure (and frankly incomprehensible) points of VAT law.
Setting a rate of VAT harmonised across the EU has long been the EU’s aim. In 1992, the Council decreed that all member states were required to apply a standard VAT rate of at least 15%, with reduced rates of at least 5% on specified goods and services.
In December last year the European Council amended the VAT rules by limiting the number of items on which Member States can apply the reduced VAT rate of at least 5% to a maximum of 24 items – which must be on the EU’s approved list – while just seven items can have rates below 5% or be exempt from VAT. EU members must also phase out their reduced rates or exemptions for fossil fuels by 2030. Similarly, reduced VAT rates or exemptions on chemical fertilizers and pesticides will have to finish by 2032. This means that were we still members of the EU, our current 5% VAT on domestic energy bills and fuel would have to increase to 20%.
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