The Department of Finance has reacted with fury to proposals from the European Commission that would oblige the Government to impose VAT on children's clothes and shoes, write Denis Staunton in Brussels and Mark Hennessy
The measure is part of a package aimed at "rationalising" reduced rates of VAT throughout the EU.
"This is a perfect illustration of why we feel as strongly as we do about tax harmonisation. It is absolutely central to where the treatment of tax matters is going," said a Department of Finance spokesman.
European Commissioner for the Internal Market Mr Frits Bolkestein said he was aware of sensitivity over the issue in Ireland and recalled that a Fine Gael-led government had fallen over the matter.
"I know this is likely to be criticised. I am sure it will be presented by some as a proposal to tax motherhood and apple pie," he said.
Ireland and Britain apply no VAT to children's clothes and shoes, Luxembourg applies a reduced rate of 3 per cent and all other EU countries apply standard rates between 15 and 25 per cent. Mr Bolkestein said studies showed the price of children's clothes and shoes in Britain and Ireland were above the EU average, even without VAT.
"The benefits of a zero rating accrues not to the clients, not to the public, not to the children, it accrues to either the producer or the retailer," he said.
"The VAT proposal is being dressed up as a simplification measure but its effect would be to remove certain goods from the current zero rate," the Department of Finance official said. "As far as we are concerned that amounts to a tax change. We are saying that this is precisely why all matters on tax must be dealt with by unanimity, including technical measures.
"We just will not have this. They are proposing this as no more than a simplification but the effect would be to change rates. That is precisely what we are concerned about," he said. However, the Government's position will be strongly threatened over the coming months in the upcoming inter-governmental conference.
The Commission claims that Britain and Ireland's zero rate of VAT could distort the single market by allowing businesses to enjoy higher profit margins than in other countries. Ireland's Commissioner, Mr David Byrne, spoke against the proposal at yesterday's Commission meeting. He was supported by Mr Neil Kinnock and Portuguese Commissioner Mr Antonio Vitorino but most Commissioners backed Mr Bolkestein's plan.
The Minister for Finance, Mr McCreevy, said on Monday that he will veto the proposal, which needs the support of all new Governments, unless the threat to impose VAT on children's clothes and shoes is lifted.
The Dublin MEP Mr Proinsias De Rossa rejected Mr Bolkestein's argument that the zero VAT rate represented a distortion of the single market and criticised the Government's failure to persuade the Commission not to include children's clothes and shoes in its proposal.
"The Internal Market Commissioner Frits Bolkestein is taking an ultra-liberal ideological stance on this issue with his claim that the zero VAT rate on children's clothes 'distorts' the internal market. I for one am not aware of influxes of continental parents travelling to Ireland to buy VAT-free children's clothes. Applying VAT to children's clothes and shoes would be a regressive move. It would place extra burdens on already hard-pressed parents and further increase inflation. I also have to query the effectiveness of the campaign waged by Charlie McCreevy on this issue in Brussels over recent months," he said.
The Commission's proposal would allow France to charge a reduced rate of VAT on restaurant bills but Mr Bolkestein rejected a call to allow lower VAT on CDs and DVDs.