VAT rates are, in principle, not decided upon at EU level. EU Member States do agree, however, which rates would apply to each category of services belonging to which rate level. Within each of these rate levels there is a further range of rates, from which each Member State can choose which one to apply.

The European Council has now agreed to make it possible to reduce VAT rates in certain sectors by enabling Member States to include them in the reduced rate level. VAT Directive 2006/112/EC will be amended so that individual Member States can apply a rate of between 5 and 15 per cent to (i) the housing sector, (ii) restaurants, (iii) books, (iv) labour-intensive sectors, (v) pharmaceutical products and (vi) some categories of medical equipment.

The reduction in VAT rates has long been opposed by Germany for budgetary reasons. Germany has now conceded in view of the current financial crisis and the expected benefits of the rate cut on the economy.