Small firms welcome prospect of VAT relief

Small businesses have reacted enthusiastically to European proposals to allow lower VAT on locally supplied and labour-intensive services, potentially to a rate as low as 5%.

Yesterday's proposal by Laszlo Kovacs, European commissioner for taxation and customs union, aims to formalise and simplify an existing arrangement that lets EU member governments set lower VAT rates on certain industries that are dominated by small businesses. The affected sectors include restaurants, domestic and personal care services such as home help and hairdressing, and certain repair, maintenance and renovation trades.

At present, derogations granted to some member states mean that not all EU members can introduce lower rates in the sectors. Explaining the proposal, Kovacs said: "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 Federation of Small Businesses (FSB) called on the government to support and implement lower VAT rates, but also for the continuation of historic exemptions for items such as newspapers and children's clothing.

"As the credit crunch bites, some of the first luxuries to go will be home improvements, eating out and a trip to the hairdressers," said Tina Sommer, the FSB's EU and international affairs chairman. "Local businesses in these areas will welcome this move."

"The British government must take advantage of these proposals to ensure our high street can survive the economic downturn."