ENLIVENING the closing minutes of ICM's conference on Managing Privatised Railways in London on January 16 was a chilling dissertation by Celia Brennen of KPMG on the looming horrors of Value Added Tax. January 1 1997 saw the expiry of a derogation which legitimised a long-established practice in some European Union states of not charging a positive rate of VAT on public transport fares. Specifically, rail fares are zero-rated in Britain and exempt in Denmark and Ireland.

In theory, the European Commission could now bring infraction proceedings to enforce compliance with a rule that actually dates from 1973. While this may be unlikely, the Brussels bureaucrats certainly are working on a plan to harmonise VAT on fares across modes and frontiers which has profound implications for international rail travel in particular. KPMG was commissioned to advise on these.

Among the 12 EU countries which do not exempt fares from VAT, the rates imposed on rail tickets currently range from 0 to 15% with an average of around 8%. Given that EU policy is supposed to favour public transport over the car, a rate of 5% to 7% is likely, but even so, Ms Brennan believes 'the administrative costs of VAT are very large.' For example, it could cost Britain's franchised train operators between £90m and £150m to upgrade their ticket issuing systems so as to provide a VAT invoice for each transaction, paper copies of which then have to be stored for six years according to current rules. While business travellers would be able to claim the VAT back, most passengers would not.

Last September, the Community of European Railways set out its position on harmonisation, and as a minimum demanded equality with air and sea transport operators; these are not only exempt from VAT (or zero-rated), but are permitted to sell duty-free goods for intra-Community travel whereas railways are not. CER points out that putting VAT on fares will typically reduce rail travel by a like percentage, if there is no corresponding tax applied to cars or planes. When VAT was applied to rail tickets in Switzerland, fares were raised by 6·5% but produced 7% less turnover, increasing the subsidy burden on taxpayers substantially. The CER notes that 'the total additional cost for the country of this transfer has yet to be quantified.'