EU leaders consider proposal to cut VAT

Nicolas Sarkozy and Gordon Brown have not been seeing eye to eye recently on the merits of the British Prime Minister's decision to cut VAT.

Ironically, at the next EU leaders' summit in March, they will be considering a proposal that would allow national governments to cut the rate of VAT to 5% on a whole range of labour-intensive activities including food served in restaurants and pubs.

If ever there was a case for the renewal of the entente cordiale this is it, since the traditional French café is under as much threat as the British community pub.

In 1960 France had 200,000 cafés but now it has fewer than 41,000 — two close every day. The new power would be discretionary and would not apply to alcohol, but if implemented it could give a boost to pubs with a significant food offer.

Meanwhile, a debate on the structure of rules regarding alcohol duty is only just beginning with a consultative paper due later in the year.

The Campaign for Real Ale (Camra) has been leading the calls to allow a lower rate of duty for draught products. This would allow similar policies to be developed as in Canada where many provinces have a lower duty rate for draught beer than for packaged beer. This system has been in place for many years and was introduced to protect the on-trade as it pays more overall tax per pint. This is because the higher on-trade retail price results in greater sales tax, which like VAT in the UK is paid as a percentage of sale price.

The European Commission is far from persuaded that draught beer should be favoured in this way, expressing concerns about the dangers of fraud and if it could be interpreted as a protectionist measure favouring domestic producers. Nevertheless, it has said to Camra that it wants to engage in debate and would welcome further evidence and submissions.

The question would of course remain for any Chancellor contemplating a reduction in VAT on food served in pubs and restaurants or a lower rate of duty on draught beer: how would it be paid for?

The obvious answer is to rebalance alcohol taxation. If duty on cider was the same as beer, the Government would be £285m richer, which could fund a 5p reduction in duty on draught beers and cider to support community pubs.

John Grogan is Labour MP for Selby