Eurosceptic MPs have joined a rebellion over George Osborne’s budget after the chancellor appeared impotent to scrap VAT on tampons. However, an upcoming EU review of tax powers for member states could soon silence tampon tax complaints altogether.
It is worth dispelling some myths about VAT on tampons. Neither the UK nor the EU considers tampons a “luxury” item. Higher tax on luxuries was abolished in the 1970s, and today items are taxed either at the standard rate, a reduced rate or zero. Under the ‘VAT Directive’, all member states must agree what products are eligible for the last two categories; countries can then choose to set a reduced rate, but it must be at least 5%.
Sure enough, tampons are on the EU’s reduced rate list (see Annex III), and in the UK are taxed at 5% VAT rather than the full 20% rate. Most EU countries tax sanitary products at their standard VAT rate, with the exception of Ireland where they are tax-free. Sanitary products are not taxed in Ireland because, unlike in the UK, they were already zero-rated before the VAT Directive came into force.
The aim of setting lower limits to VAT across the EU is to prevent a race to the bottom in taxation, which could encourage cross-border shopping for many items. This could distort the single market, tie up businesses in red tape and reduce government revenues. The UK was a driving force behind regulating VAT at the time, and remains in favour of coordination.
Incidentally, contrary to another prevailing myth, men’s shaving razors in the UK are taxed at the standard 20% rate.
New VAT plans to end tampon tax in UK
Most would agree that removing controls on tampon VAT isn’t about to start a competition war. We are, after all, talking about 10p saved on every standard 20-box of Tampax.
Recognising that the VAT system “urgently needs to be modernised and rebooted”, the EU is promising to begin a rethink. On 18 March EU leaders agreed a statement saying that sanitary products would be part of the discussion.
Although nothing is yet decided, an EU official outlined to InFacts two proposals that would give states more flexibility over their VAT.
The first option allows member states to introduce reduced or zero rates on goods, provided that the same rates “had already been granted to another Member State”. Under this proposal, Ireland’s zero rate for tampons would allow the UK to stop taxing them.
The second option would leave states free to adopt the rates they wanted, so long as they do not create “risks of unfair tax competition or unduly complicate the VAT system”.
The adoption of either of these proposals will require the agreement of all 28 member states. But considering the political momentum in the UK against the tampon tax ahead of the 23 June referendum, the Commission is bound to be keen for a decision that lets the UK scrap the levy.
Edited by Alan Wheatley
This article was republished on 18 March to include EU leaders’ agreement on VAT reform and clarify details of the EU’s current VAT regime.