For some time now, it has been apparent that, when tax-motivated border checks are abolished within the EC Single Market, a closer approximation of indirect tax rates would be required, particularly between neighbouring member states, if unacceptable diversions of trade and revenue were to be avoided. Budgetary policy here in recent years has responded to this requirement through a combination of reductions in the standard VAT rate, a virtual standstill in the main excise duty rates, except those on tobacco products, and the abolition of many minor exercises. These changes, coupled with certain upward adjustments in UK rates, have resulted in a considerable narrowing of the differentials in indirect tax rates between the two countries. For example, whereas there was a 10 per cent difference between the respective standard rates of VAT in 1989, this gap has now been reduced to 3.5 per cent.
The other remaining main areas of rate divergence concern domestic energy products, zero-rated in the UK but liable at the 12.5 per cent VAT rate in the State, beer, wine, petrol, heating oil and motor vehicles, where excise rates are significantly higher than in the UK.
Under the post-1992 arrangements agreed by the ECO/FIN Council, the freedom of private individuals to purchase in other member states without tax implications will be the guiding principle. However, in order to limit potential cross-border trade distortions, the Council have also agreed that as regards VAT special arrangements shall apply for a transitional period, until end-1996 at least, in the following areas: mail order and distance sales, i.e. where goods are dispatched or transported by or on behalf of the supplier to a private individual in another member state; new vehicles and other means of transport and, covering private cars, commercial vehicles and certain motor cycles, boats and aircraft; non-taxable bodies and small traders, involving purchases above at least 10,000 ECU annually.
In these cases, VAT will be payable in and at the rate of the country of destination.
The Council have also agreed that member states who apply zero-rating should have the option to retain such rating, at least, during the transitional period. In recognition of the distortion of competition that this could involve for Ireland, because domestic energy products are zero-rated in the UK, it has been agreed that, following a favourable opinion from the Commission, we may apply a reduced rate to such products.