Commission suggests boosting job-creation potential through VAT cuts

In preparation for the special Employment Summit on 20-21 November 1997, the European Commission launched a proposal which would give Member States the option of reducing VAT rates for certain labour-intensive services provided locally, in order to boost employment opportunities in this area.

Criticisms have been levied against the perceived punitive effects of high rates of value-added tax (VAT) by employer and employee representatives in certain sectors - an example is the cleaning industry (EU9710153F). In light of this, the European Commission has put to the European Council, in advance of the latter's Jobs Summit to be held on 20-21 November 1997, the idea of authorising the Member States to apply a reduced rate of VAT on certain highly labour-intensive services supplied locally. The proposal which, if approved, is to apply on an optional and trial basis, is based on the initiative of Mario Monti, the member of the Commission with special responsibility for taxation. If the Council shows itself in favour, the Commission is planning to present a proposal for a Directive outlining the following principles:

  • Member States will be able to choose whether or not to introduce such a measure;
  • a reduced rate of VAT must under no circumstances result in distortions of competition. This risks of this happening would be examined by the Commission both before and during the trial period;
  • the measure would be applied for three years only (from 1 July 1998 to 30 June 2001) and would then lapse automatically;
  • to qualify, services must be highly labour intensive and, as a general rule, be supplied locally. In the Commission's opinion, the following service categories could offer the best opportunities, and Member States could choose between them:
    • repair of movable or tangible goods (with the exception of means of transport other than bicycles),
    • renovation and repair of housing (with the exception of new buildings),
    • entertainment parks, cleaning and laundry services, personal services and services such as home help and welfare services for young people, people with disabilities and older people;
  • the reduced rate must not apply to the supply of goods.

The proposals are part of the Commission's approach towards fostering employment, particularly by reducing the costs of unskilled labour and by involving local business to meet currently unmet needs in the Community, where the financial thresholds for the take-up of such services is currently too high. It is also argued that the reduction of VAT on labour-intensive services could assist in combating the underground economy and thus create jobs in the formal economy while reducing the harmful impact of such underground activity on the state, private businesses, unemployed people and employees. The case for introducing such a measure throughout the Community will subsequently be examined in the light of the job-creation results achieved during the trial period.

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