VAT fraud often takes the form of a carousel fraud, which allows the same goods to be bought and sold repeatedly through the same companies, creating fictitious VAT repayment claims. Last September, for instance, UK customs officers uncovered such a fraud when a gang of four, including a former United States judge and a music producer, were jailed for a total of 22 years for their part in a GBP44m VAT scam.

For more than two years, the quartet operated a scam which involved the buying of mobile telephones through fictitious companies and using false receipts to charge VAT on the transactions. The gang used forged letterheads and logos from existing UK companies in order to lend legitimacy to their operation. The proceeds were then siphoned off to a series of bank accounts in Hong Kong.

The European Federation of Accountants (FEE) thinks that the overly complex nature of the current VAT system facilitates such frauds, loses EU member states revenue, and adds to the cost burden for business. As well as tackling fraud directly, through EU-level legislation or codes of conduct, Austria would like to see the EU adopt a harmonised VAT tax-base, and thinks that there should be more use of the 'reverse-charge' mechanism which reduces the scope for fraud.

A meeting organised last year by FEE, which brought together leading taxation experts from across Europe, was concerned that VAT had not sufficiently evolved over the 50 years since the introduction of the modern VAT system in Europe. As the recent EU enlargement will make VAT matters yet more complex, Mr. Stephen Dale, Chairman of the FEE Indirect Taxation Working Party, emphasised that "the VAT system needs to be updated. A mind-set change is required from VAT policy makers in order to reflect the reality of doing business in the EU today."

At a conference organised by the European Anti-Fraud Office (OLAF) in Brussels last November, VAT fraud was a main focus. OLAF judicial experts discussed the practical implications of their investigation and operations in these areas with over 70 anti-fraud prosecutors from 27 countries and from Eurojust.

'In this area there is often a link to organised crime, terrorism and money laundering,' said OLAF. 'Like any tax VAT is not popular with those who have to pay and the citizens of Europe who pay VAT are entitled to expect that the Member States, the Commission, OLAF, Eurojust and all others concerned take all necessary measures to prevent and fight fraud in this area.'

The legal basis for OLAF stipulates that an OLAF investigation report shall constitute admissible evidence in administrative or judicial proceedings of an EU-Member State in the same way and under the same conditions as administrative reports drawn up by national administrative inspectors. The main precondition is that the procedural requirements laid down in the Member State’s national law have been respected. In the course of a subsequent national judicial investigation, OLAF may then further assist the national prosecuting authorities in their work.

OLAF looks forward to the day when a European Public Prosecutor is established, as foreseen by the stillborn EU Constitution. It would then be able to take on the prosecution of cases of fraud against the EU’s financial interests, such as cross-border VAT fraud.

“Fighting VAT fraud is very important to us,” said Mr Grasser, in an interview with the Financial Times last week. Austria introduced a so-called “reverse charge” system, initially covering VAT claims in the construction sector, in January 2003, which Mr Grasser said had been extremely effective. Reverse charging, similar to US sales tax, involves levying tax on goods when they reach the consumer, rather than when moving between intermediaries.

“We can all learn from each other. We think in Austria alone, we generated about €200m in 2003 alone,” he said. Mr Grasser said Austria intended to extend the system from construction to all inter-company transactions, and would also push its EU partners to adopt similar measures on a voluntary basis.