The zero rating of VAT applied to women’s sanitary products grabbed the headlines following the Budget. As well as being a social victory, it also demonstrates the European commission’s flexibility when it comes to reducing VAT on other products.
The agreement reached by 28 EU leaders on the European council in March allowed the government increased flexibility to reduce rates of VAT, and scrap the unpopular 5% levy applied to sanitary products.
As detailed in the Finance Bill, the exchequer expects this measure to decrease receipts by £15m. “The question though is what difference to the market place is going to arise from a removal of the 5% turnover to a 0% rate,” said Graham Elliot, Director at VAT specialists City of Cambridge consultancy. “There is no legal requirement of the retailers of this product to reduce their price by the same amount.”
So while the so called 'tampon tax' on its own may be seen as a political stunt, Elliot says it indicates a major “shift in the general views of the European union in favour of countries being able to nominate certain supplies that will go down to the 0% rate”.
Up until these changes, Elliot says, the view has been that the European Union has been trying to level the rates to create a broader tax base with fewer exceptions and exemptions. But the EU permitting zero rating on sanitary products does suggest that it is open to going in the opposite direction.
“Whether that is an opportunity for products besides woman sanitary products, or whether there is going to be some quid pro quo that causes us a bigger problem, remains to be seen,” Elliot said.
Overturn EU's VAT demands
The new EU VAT agreement could open the door to overturn other EU VAT demands, like the European court of Justice’s ruling that reducing energy saving materials was in breach of EU laws.
The government had originally earmarked March’s Budget to announce the VAT increase on energy saving materials such as solar panels from 5% to 20%, and planned on implementing the levy from August, as discussed in its consultation. Greenpeace estimated that had the solar panel levy been applied, installing the typical panels as seen on rooftops would have increased the price from £6,000 to £7,000.
However, the Finance Bill didn’t include the expected EU VAT ruling on energy saving materials.
Pressurised by a coalition of Labour, SNP and a rebellion of Eurosceptic Conservative MPs, the government has since made a U-turn in the days following the Budget on their plans to apply the European Union’s ruling, and accepted Labour’s amendment to hold off from imposing the VAT hike on energy products.
While no formal statement has been released, the treasury said in an email: “installation of all energy saving materials including solar panels, wind turbines and water turbines will also continue to benefit from the current, reduced rates of VAT”.
Whether the VAT increase on solar panels has been delayed or scrapped altogether remains to be seen, but if the government are willing to defy the European court of Justice, maybe the ramifications of the zero rating on sanitary products could actually go beyond this one product.