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VAT bombshell for a separate Scotland

23 Feb 2014

Struan Stevenson MEP

A separate Scotland will lose the right to apply zero rates of VAT to a range of goods, the European Commission has confirmed to the Scottish Conservatives.

In a move that could cost the economy billions of pounds in the event of independence, the EC said any new member would have to apply a minimum of 15 per cent VAT to all goods, with “one or two” areas receiving a special rate of five per cent.

That means a huge list of items would instantly become more expensive, including newspapers, books, equipment for the disabled and children’s clothes.

In addition, huge sections of construction like shipbuilding and aircraft repair would also lose the right to zero per cent VAT.

And not only would it cost business and consumers significant amounts of cash, it would also make an independent Scotland less competitive than its neighbours in the rest of the UK.

In a letter from Donato Raponi, head of unit at the EC taxation department, the stark situation was set out clearly.

He said: “Under the current EU VAT rules, member states are obliged to apply a standard rate of at least 15 per cent and may also apply one or two reduced rates, set no lower than five per cent.

“Once the accession treaty is agreed along with any VAT derogations, it is no longer possible for a member state to introduce special VAT rates.

“The member state must apply the EU rules.”

The UK only enjoys zero per cent VAT on 54 areas because of a longstanding agreement, which Scotland would not be able to apply should it break away.

It is the latest in a line of demands an independent Scotland would have to comply with in order to gain entry to the EU.

Little mention is made of the VAT issue in the Scottish Government’s separation White Paper, although Alex Salmond’s adviser Sir James Mirrlees has suggested VAT should be extended to almost all spending.

Scottish Conservative leader Ruth Davidson MSP said:

“Yet another potential cost of independence has been exposed.

“We know that within the UK families don’t have to pay VAT on vital items such as books or children’s clothes.

“The European Commission has now confirmed that, as a new member, an independent Scotland would be forced to give up those hard won tax breaks which help ordinary families every year.

“That means a minimum five per cent increase on thousands of goods.

“No ifs, no  buts – those are the rules for any new member.

“It’s not just Scottish families that would be affected, but Scottish business too.”

“Thousands of people in Scotland are employed across the construction sector in areas like shipbuilding and aircraft repair – areas which benefit enormously from VAT exemption and would be hit hard by such tax breaks being taken away under independence.

“None of this has been spelled out by the SNP.

“We now need Alex Salmond to tell us fairly and squarely – what will VAT rates be on all these household items after independence?

“How much more will already hard-pressed families have to pay for children’s clothes and books?”

Scottish Conservative MEP Struan Stevenson said:

“This is a massive tax bombshell which will have a huge impact on business and industry in a separate Scotland.

“HMRC list 54 different items that currently enjoy zero-rates of VAT in the UK, ranging from children’s clothes to books and newspapers, and even large swathes of the construction sector like shipbuilding and aircraft repair.

“Placing a mandatory five per cent or higher VAT rate on these goods will cost Scotland a fortune.

“It will make us less competitive than our main trading partners in the rest of the UK, who will continue to enjoy their zero-rated VAT derogations.”

 

 

 
To see a list of all items exempt from VAT, visit:
www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm#5
Below is a link to the Sir James Mirrlees review, published with the IFS, which concluded that VAT exemptions should be removed.
http://www.ifs.org.uk/pr/mirrlees_sept11.pdf
 
In the Scottish Government’s White Paper, the main mention of VAT appears in the Question and Answer Section, question 483:
“Independence will enable the Scottish Parliament to explore a reduction in VAT on repairs and maintenance work to homes as part of wider taxation priorities.
“Powers over VAT, currently exercised by the Westminster Government, will transfer to the Scottish Parliament as a result of independence. The tax system in place immediately before independence will be inherited at that time. Thereafter decisions on the tax system and all specific taxes – including tax rates, allowances and credits for VAT and other taxes – will be made by the parliament and government of an independent Scotland.”