For years now the European Union severely limited the ability of national governments to reduce VAT rates – which fact seemed to have escaped Tony Blair who promised cuts during the 1997 General Election though he “found out” later. Good excuse not to keep your manifesto promises eh?

However following a meeting earlier this month the European Commission (EC) have brought forward proposals to allow reduced value-added tax (VAT) rates for a wider range of services and this could provide the United Kingdom government with an opportunity to boost the increasingly pressurised economy.

The EC has proposed extending their recent successful pilot scheme to allow all European Union member states to apply a reduced VAT rate of 5% to certain labour-intensive services, including the supply of restaurant and catering services, hairdressing, window cleaning, building repairs and maintenance.

A new law has been drafted and the European Council is hoping all parties will agree the final draft so that it can approve the law by the end of 2008. The UK would then have the option of introducing new reduced VAT rates for a range of services.

With current UK VAT rates at 17.5%, labour intensive businesses would benefit from an immediate 12.5% boost to their bottom line if these reduced rates are adopted.

These changes could make the difference between a business surviving or failing as the downturn bites.

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Category: Taxation

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