The European Commission today issued a proposal to change the VAT Directive so as to allow member states the flexibility to apply reduced VAT rates for some specific services on a permanent basis.

The sectors concerned are mainly so called labour-intensive services and locally supplied services, including restaurant services.

László Kovács, Commissioner for Taxation and Customs Union said: "I propose generalising the optional application of reduced rates in sectors where there is sufficient evidence that no real distortions to the Internal Market will occur. I want to provide certainty about the application of reduced rates beyond 2010 for labour intensive sectors and provide all Member States with the same options. There is no reason why restaurant services, for example, should be allowed to benefit from a reduced rate in one half of the European Union but not in the other half."

The European Commission explained that the scope of the proposal is limited and most of the services in question are already eligible for a reduced rate in a limited number of member states and only for a limited period running until 2010.

The Commission is currently carrying out a number of studies concerning the possible use of reduced rates for energy saving materials or energy efficient goods and services in accordance with the request formulated by the European Council in March 2008.

In terms of the new proposal, the housing sector will no longer be limited to services linked to a social policy, as it is currently, but will be broadened to include the supply and construction of all housing, as well as all services related to the housing sector (including renovation, maintenance, cleaning, ...).

Supply of restaurants and catering services, excluding alcoholic beverages, are also included.

It is proposed that labour-intensive services should be permanently included in the list of services eligible for reduced rates. Moreover, the category is broadened to other locally supplied services of a similar nature including repair of tangible movable goods, (including bikes, shoes, clothese coputers and watches) but excluding other means of transport, cleaning and maintenance services, domestic care services, gardening services and renovation and maintenance services provided to places of worship, cultural heritage and historical monuments.