Our View: EU Commission is right to put an end to VAT cut abuse

The European Commission has informed the government that it does not accept the formula put together by the parliamentary parties for VAT on the construction or purchase of a primary residence. The formula had been put together after months of discussions at the House finance committee and had the support of all the parties, whose objective apart from making housing more affordable was also to ensure the construction industry would not be adversely affected by the change.

It came as no surprise that the Commission did not buy the new proposal. Finance ministry permanent secretary, Giorgos Panteli, informed the House finance committee on Monday that the Commission said the proposal was not compatible with the European acquis. What is astonishing is that the parties believed their proposal, which could not be described as socially targeted by any stretch of the imagination, would have been given the go-ahead by the Commission, after the way the reduced VAT idea had been abused.

The proposal that has been rejected envisaged a 5 per cent VAT (instead of 19 per cent) on properties up to 190 square metres floor space and valued up to €350,000. Lower VAT would also be charged on the first €350,000 of properties of 190 square metres valued up to €475,000. By what social policy logic, could someone who can afford to buy a property close to half a million euro be entitled to VAT discount? What were deputies thinking in including this provision in their proposal? Did they really think the Commission would accept this as a socially targeted measure?

According to Panteli, the Commission had set a floor-space maximum of up to 110 square metres for eligibility and if the price of the property was above €350,000, 19 per cent VAT would be paid on the full amount. It is clear Brussels does not want to leave any loopholes, given the abuse under the previous legislation, by which 5 per cent VAT was charged on the first 200 square metres of a primary residence, irrespective of its value. This interpretation of the ‘social policy’ meant a buyer was entitled to 5 per cent VAT (for the 200 sq. metres) on a property worth one or two million euro.

The Republic faces infringement procedures for this measure, which benefited the wealthy investors of the citizenship scheme. Panteli said that if the matter was not settled soon, the Republic would be dragged before the European Court of Justice for things to be put right. If in the meantime new legislation considered incompatible with European law was approved, another infringement procedure would be initiated, he warned.

The parties must understand the gravity of the situation, leave aside the populism that fashions most of their decisions and act responsibly. The Commission is not joking about the infringement procedures and will not tolerate a ‘social policy’ measure, aimed at helping low earners buy a home, being abused in the way it has been in Cyprus.