The French government has won a long campaign in Brussels to lower the rate of VAT in French restaurants.

France has now been granted the right to lower the rate of taxe sur la valeur ajoutée (TVA) to 5.5%. The decision as to the actual rate has been left to the French government, although it seems the full reduction is to be applied.

The issue has been high on the agenda of successive French governments since the beginning of the decade, and was taken up in earnest by Jacques Chirac during his time as President of France.

The mantle was picked up by his successor President Sarkozy who declared during his election campaign that, ‘The reduction in VAT is not something that I promised, but it is something I will obtain’.

He was no doubt spurred on by forceful lobbying from the French hotel and restaurant industry, who have argued that a reduction in VAT was an indispensable necessity for the future prosperity of their sector. Jacques Borel, President of the Union des Métiers et des Industries de l'Hôtellerie declared that, ‘There are three conditions for success in the restaurant sector – prices, prices and prices.’

One of the undoubted reasons for their success is because of the high level of employment in the hotel, café and restaurant sector. The sector employs around 850,000 people, and creates around 30,000 new jobs each year.

The problem for the French government has been that the level of VAT on products and services within the EU is decided on an Community wide basis, as a means of minimising distortions in competition between the various Member States.

The minimum rate of VAT in the EU is 15%, although a reduced special lower rate of 5.5% is applied on a restricted range of goods and services. The list includes, notably, restoration works to older properties, a legacy from another hard fought battle the French government won in 1999 to lower the rate of VAT on repair and improvement works to older properties.

Whilst the EU Commission has always been cast as the villain of the peace in opposing the request by France to lower the rate of VAT on restaurant meals, it is clear from the announcement that was made last week that the main opposition has come from Germany, who feared that it would open the floodgates to others seeking similar concessions.

As a result, Germany and several other countries within the EU have signed a joint declaration that they would not be prepared to concede further reductions in VAT in Europe. Without unanimity on the issue, no further reductions in VAT can be passed.

The declaration, therefore, effectively buries a proposal that has been made by the French government for a reduction in VAT on ‘green’ products in Europe.

Accordingly, in a sleight of hand, simultaneously with the VAT announcement, the French Ministry of Finance announced that relief currently granted to restaurant owners on social security contributions would be abolished. The result is that the net cost of the change will now be around €1 million.

It is by no means certain that the reduction in VAT will feed through to a reduction in restaurant prices. Many restaurant owners have stated that it is just as likely to be retained by them in order to improve the profit margin of their business. Others have stated it will be used to improve staff wages and/or the staff training.

Nevertheless, the French government have stated that, as a prior condition of the application of a rate of 5.5%, they will require that some of the benefit is passed on in a price reduction to customers. If so, it will apply to meals in hotels and cafés, as much to those in restaurants.