Reduced VAT rates are an important way of helping people on low incomes

Published on 4 January 2013

The European Commission is seeking opinions on how member states apply reduced rates of VAT, and LITRG have responded stressing the important role played by reduced rates in taking care of the more vulnerable members of society. We conclude that member states should keep their ability to apply reduced rates of VAT, including zero rates and exemptions.

VAT is fundamentally an EU-designed tax, so it is within the remit of the European Commission to look closely at the use member states make of reduced rates of VAT. In the UK and some other countries, reduced rates of VAT are used as a way of keeping down the cost of goods and services, such as domestic fuel or heating installations, which are widely consumed by low-income households. The UK also makes extensive use of VAT zero rates and exemptions for social reasons, although these are less common in most other countries.

One argument that is sometimes raised against deviating from the standard rate of VAT is that member states should use other ways than VAT to look after their more vulnerable citizens. These include the benefits system, or direct assistance such as domiciliary or residential care. LITRG’s response puts the other point of view. Such subsidies might simplify tax rates but at the cost of a more complex benefits system. Benefits are too ‘scatter-gun’ in how they apply to a diverse population to compensate everybody fairly. Besides, many people who would otherwise be entitled might not claim the benefit or other subsidy intended for them. By contrast, reduced rates should automatically give a benefit to the intended consumer, provided they are used where traders pass on the reduction in VAT rather than absorbing the benefit for themselves.

The Chartered Institute of Taxation's response can be accessed following this link. Follow the link below to read LITRG's response.

PDF icon LITRG response


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