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Small computer outfits could see VAT rates slashed to as low as five per cent under new proposals put forward by the European Commission yesterday.

The EC, which is the executive arm of the European Union, said it wants to relax value added tax and state aid rules in a move to help small businesses (SMBs) cut through administrative red tape and promote economic growth.

Under the VAT changes proposed, labour-intensive and locally-supplied services including restaurants, cleaning and gardening services, domestic care and small computer outlets would be eligible for a reduced VAT rate, in some cases as low as five per cent.

EC Commissioner for taxation and customs union László Kovács said he wanted to clarify Brussels’ position on reduced rates in the various sectors highlighted under the new proposal.

“I want to provide certainty about the application of reduced rates beyond 2010 for labour-intensive sectors and provide all Member States with the same options. There is no reason why restaurant services, for example, should be allowed to benefit from a reduced rate in one half of the European Union but not in the other half," he said.

At present 11 of the 27 EU countries have special arrangements until 2010 to levy rates below the standard 15 per cent for services such as computer repair shops, hairdressers and catering outfits. While the remaining member states, “complicated by a multitude of derogations”, cannot apply such an option to their VAT rates.

The Commission yesterday also adopted regulation that automatically approves state aid for jobs and growth that would particularly benefit SMBs, help protect the environment and encourage more women to start up and develop a new biz.

The new rules will come into force in the coming weeks allowing governments to grant aid in favour of SMBs investing in research, innovation, regional development, training, employment and risk capital, without first having to seek permission from Brussels.

State members can cough up to €7.5m (£6m) to SMBs under the new regulations.

Competition Commissioner Neelie Kroes said: "These new rules set out a clear framework to allow Member States to grant aid targeted at creating jobs, boosting competitiveness and improving the environment without the Commission having to get involved at all."

The UK’s Federation of Small Businesses (FSB) welcomed the EC’s proposals on VAT and also called for the British government to relax its tax rules.

“As the credit crunch bites, some of the first luxuries to go will be home improvements, eating out and a trip to the hairdressers, so local businesses in these areas will welcome this move. The British government must take advantage of these proposals to ensure our high street can survive the economic downturn,” said the FSB’s EU international affairs chairman Tina Sommer.

Meanwhile, the British Chambers of Commerce (BCC) today issued a dire warning in which it claimed that Blighty is on the brink of a recession and added that unemployment could rise by 300,000 by the end of 2009.

It said the economic outlook for the business sector was "grim and ominous" and the downturn could be "longer and nastier" than previously expected. The BCC garnered its gloomy findings from a survey of 5,000 large and small businesses across the country.

"Some key results, mostly in services, are at historically low levels not seen since the recession of the early-1990s,” said BCC’s economic adviser David Kern.

He called for the treasury to consider the option of early interest rate cuts and added: “On its part, the government must alleviate acute business concerns over new taxes and regulations, and must stand ready to support vulnerable small businesses." ®

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