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Reduced VAT on Home Improvements 2 December 2003

Recently there has been speculation in both the trade and media concerning the reduced rate of VAT on repair and maintenance of private dwellings, and whether or not it is to be extended beyond the planned end date of 31st December 2003.

In order to clarify the position the Treasury has issued the following statement, which explains the background and sets out the current position.

The 5% rate of VAT currently being applied to work on household, domestic repairs and improvements was introduced on the 1st January 2000 as a temporary and experimental measure in some member states across the European Union. Although it is not part of the EU, the Isle of Man was included in the scheme because of its Customs Agreement linking VAT rates to those of the United Kingdom, which is of course an EU member. This relationship which has existed since the start of VAT means that the Island's VAT laws must comply with the various EU VAT Directives. This in turn requires the Island to be bound by the final decision of the EU in this specific matter.

Originally the reduced VAT rate was due to expire on 31st December 2002. However, because the European Commission (the EU's administration and executive) had insufficient time to evaluate the effect of the measure, it made a proposal to extend the period of the experiment for another year. As a result the scheme was maintained for a further year but it is now due to lapse on 31st December 2003.

The European Council of Ministers (ECOFIN) and the European Commission have entered into discussions regarding reduced rates generally, and specifically whether or not those relating to residential property should be continued and/or form part of permanent legislation. No firm conclusions were reached at ECOFIN's meeting on 24/25 November, with the matter being held over. The effect of there being no firm decision as to whether or not the reduced rate should or should not continue has been to generate a substantial degree of uncertainty for both builders and householders alike.

In the past the Treasury has supported the 5% rate and the Minister has made this clear. The Treasury continue to support the reduced rate and wish to see it continue. Whilst the ultimate decision on this matter has to be determined in Europe, everything that can be done to bring clarity to the situation is being done. Customs and Excise will be meeting their UK counterparts this week to discuss whether an agreement can be reached that, in the absence of a decision in Europe, the status quo can be maintained : that is to retain the 5% rate until a decision is finally made.

Should it be necessary to revert to the full standard rate, then there will be transitional arrangements in place which will explain how the trade should approach their customers and any accounting problems that they may have. A copy of these will be available from Customs and Excise and they will also be published on their web-site.

When a decision on the scheme to incorporate the reduced rate into existing legislation or reversion to standard rating is taken, then of course this will be widely publicised immediately.

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