A draft European VAT directive changing VAT liability rules which effectively
prevents Britons from shopping around for suppliers from low-VAT member states
is being debated in the Commons on Thursday. The directive proposes switching
‘business to business’ VAT liability from a supplier’s country to that of the
MPs on the European Scrutiny Committee demanded the move after the
government insisted the change in VAT liabiity rules was needed to safeguard
revenue and limit the threat of competition to British businesses from
firms in low VAT regimes – or the incentive to UK companies to relocate to
low VAT states.
The new compromise draft rule agreed in the Council of Finance Ministers
during the UK Presidency required services capable of beig supplied across
borders to be taxed in th country where they are consumed, and will apply to
telecommunications, broadcasting, electronic services and the long-term
hiring of vehicles.
But a proposal to apply the same rule to distance teaching services has been
scrapped. The majoroity are VAT exempt.
The directive will also apply a ‘country of departure’ rule to VAT liablity
for to catering and other services on board ships, aircraft and trains.
In a report, the committee recognised the government’s case, but ‘noted that
UK consumers would no longer be able to benefit from cheaper sources of
supply, being forced to pay a higher rate of tax, and that it could be
argued that in effect they would be deprived of the advantage that arises
from the single market’.
The committee said MPs should have the oportunity to examine the issue – a
u-turn for the Treasury, which has publicly opposed the harmonisation of EU
tax rules and rates on the ground that tax competition was preferable and in
the UK interest.
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