Reduction of VAT on labour-intensive services agreed

On 8 October 1999, EU Economic and Financial Affairs Ministers reached agreement on a Directive allowing Member States the option of cutting the VAT rate on certain labour-intensive services with the aim of creating employment. The list of services covered had been agreed at an informal ministerial meeting in September.

The Council of Economic and Financial Affairs Ministers reached agreement on 8 October 1999 on a Directive amending Directive 77/388/EEC on tax harmonisation, enabling Member States, on an experimental basis, to apply a reduced rate of value-added tax (VAT) on certain labour-intensive services. The new Directive was to be formally adopted at a subsequent Council meeting.

If they wish, Member State may apply reduced VAT rates for a maximum period of three years between 1 January 2000 and 31 December 2002 to specified services which are: labour-intensive; largely provided direct to final consumers; mainly local and not likely to create distortions of competition; and for which there is a close link between the lower prices resulting from the rate reduction and the foreseeable increase in demand and employment. Member States may apply the reduced VAT rate to a maximum of two of the following five types of services (or three in exceptional cases):

  • small repair services (bicycles, shoes and leather goods, and clothing and household linen);
  • renovation and repair of private dwellings, excluding materials which form a significant part of the value of the supply;
  • window cleaning and cleaning in private households;
  • Domestic care services (eg home help and care of young, elderly, sick or disabled people); and
  • hairdressing (EU9909188F).

Member States wishing to make use of this measure must inform the Commission before 1 November 1999 and provide it with details, and must draw up a report assessing implementation by 1 October 2002. Before the end of 2002 the European Commission will forward a global evaluation report to the Council of Ministers and European Parliament accompanied, if necessary, by a proposal for a final decision on the VAT rate applicable to labour-intensive services.

The Commission proposed the Directive in February 1999 (EU9902152N) with the aim of exploiting the potential for job creation in businesses offering local services (which is seen as substantial) and to assist in reintegrating some businesses which have drifted into the "informal" economy. On 10-11 September 1999, Economic and Financial Affairs Ministers, meeting informally in Turku, Finland, had reached an agreement on the list of services to quality for reduced rates of VAT, after some heated debate. The Portuguese finance minister pressed for restaurants and catering to be included. To the dismay of the European Modern Restaurant Association (EMRA), which issued an appeal for the inclusion of the sector on the eve of the meeting, his efforts failed. A report commissioned by EMRA claims that the application of the reduced rate of VAT would create up to 102,000 new jobs in the restaurant sector. At the October Council meeting, the Commission undertook to "examine positively" Portugal's request to include restaurants, and the Council agreed to this "in the belief that it allows Portugal to continue existing practice"

The French finance minister announced that from 15 January 2000, France would reduce VAT from 20.6% to 5.6% for building work in private dwellings and for home help.

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