Beware! VAT on food

Whether the next government is Labour or Tory, Europe could still make us impose far wider taxes, says Teddy Taylor

Those rather remarkable Labour Party posters warning about the danger of every British family facing a further tax burden of pounds 10.50 per week in consequence of a Conservative plan to place VAT on food were, in my opinion, as misleading as the firm pledge the same day from Chancellor Kenneth Clarke that there was no question of any such tax being levied. The sad fact is that whether we have a Conservative, Labour or any other government, the UK could shortly be obliged by the European Court to levy VAT on food and on several other items.

In the same way, the Labour propaganda that the Tories levied VAT on fuel and power when they were not required to do so is rather misleading, because the European Court in a decision of June 1988 required the UK to levy the tax on fuel and power supplied to industry (on the grounds that there was no clearly defined social reasons for not levying the tax). Sadly, and not for the first time, the political parties have declined even to discuss the extent to which national governments in Europe have the power to levy VAT largely removed from their democratic decision-making process.

So far as food is concerned, the danger stems directly from the fact that in 1977 (when, incidentally, there was a Labour government) Britain agreed to the Sixth Directive (77/388/ECC), which provided for the provision of common criteria for the VAT base and which also specified those goods and services that could be exempt from the tax. Exemption is, of course, considerably different from a zero rate. Supplies which are zero rated are technically taxable under European law; they count for part of the taxable turnover of a business for registration purposes; and VAT charged on inputs can be reclaimed.

Exempt goods - such as land, postal services, betting, burials and trade unions - are regarded as being outside the system. In consequence, businesses that provide exempt supplies do not charge output tax and cannot reclaim input tax. This list of exempt supplies has been determined by the EEC, and no nation can alter the list.

Article 28(2) of the Sixth Directive permitted nations to maintain reduced rates and exemptions that were in force in 1975 and that could be proved to have a clearly defined social reason. This exemption applied only to the UK and the Republic of Ireland, because every other member state applied VAT to food, to fuel, to children's clothes, to books, to newspapers and to water.

On this basis the UK continued all its zero rates, but in 1988, a considerable number, including fuel and water supplied to industry, were struck out by the European Court. The legal position was further developed under directive no 92/77/EEC, on 19 October 1992, which required member states to levy a minimum VAT rate of 15 per cent on everything that was not exempt by 1993. But there were two exemptions. First, member states had the power to apply rates of only 5 per cent on a list of items specified in a schedule referred to as "annex H". Second, there was the "British" exemption on zero rates, permitted for a "transitional period" - which ended on 31 December 1996.

So how has Britain been able to continue its zero rates? The answer is that the directive stated that at the end of the transitional period, the council would require agreement by unanimity on a definitive VAT system. It is this legal device that the UK has been using to delay the levying of VAT on food and other items.

As the then Treasury minister Sir John Cope explained to me in a parliamentary answer, in July 1993, when I asked if the Euro court could overturn the exemption: "The transitional period will continue beyond the end of 1996 if there is not unanimous agreement on the definitive VAT system ... The United Kingdom has made it clear that one of the conditions for such an agreement must be our right to retain zero rates".

But could the court challenge this legal ploy? There is no doubt that the European Commission regards the new definitive system as essential to secure the internal market, and Article 99 of the treaty gives the council the duty to establish what harmonisation is required to ensure the functioning of the internal market. And the commission has the power to take any member state to the European Court of Justice under article 169 if it is failing to implement EU legislation. The problem, as we have found so often, is that the court is not simply a body that interprets law, but is more of a political organisation with a firm determination to advance Euro integration.

I am in no doubt that the commission, particularly in view of the strong and clear proposals it advanced to the council meeting in Dublin only a few weeks ago, will initiate such proceedings. And, sadly, I see us having little prospect of success.

So what can we do? The best action would be for Tony Blair to remove the posters on VAT on food, and for all the parties to speak together on what possible defence is available to us. The food and children's clothes exemption is a further depressing sign that Euro integration is a roller- coaster on which we can place a brake for a limited period but whose advance we have no power to frustrate in the longer term.

Sir Teddy Taylor is Conservative MP for Southend East.