British Government Applies To Change Its VAT Rules To Thwart Fraudsters

by Robert Lee, Tax-News.com, London

30 January 2006

In a move to further strengthen its campaign against VAT fraud, the United Kingdom has made an application to the European Commission to be able to deal with VAT on certain goods in a new way, in a bid to cut down on 'missing trader' fraud, which, it is estimated, costs the government up to GBP2 billion annually in lost revenues.

Paymaster General, Dawn Primarolo announced last week that the government has submitted an application to the European Commission for a derogation from the provisions of the EC Sixth VAT Directive, to enable it to introduce a reverse charge procedure for transactions between VAT registered businesses in certain goods.

The measures will be targeted at goods used for missing trader intra-Community (MTIC) fraud, for example mobile telephones, computer chips and some other similar electronic items.

Missing trader fraud, also known as 'carousel fraud', involves the importation of goods (typically mobile phones and computer components) free of value-added tax. The goods are then sold on with VAT added, following which the perpetrators disappear, without having paid the necessary tax to the government.

"The introduction of the reverse charge is one of many measures designed to thwart MTIC fraud by taking the criminal profit out of the transactions," explained Ms Primarolo.

"The reverse charge is an important tool in tackling this fraud as it removes the opportunity for criminals to steal VAT. However, the Government will continue to monitor very closely those that carry out this fraud and will not hesitate to act to prevent any further threats to the tax system," she added.

Under the reverse charge procedure, the suppliers of the goods do not account for the VAT on their sales when selling to other VAT-registered businesses - instead, it is the responsibility of the purchaser of the goods to account for the VAT, although they can recover this VAT in the normal way.

The government hopes that this will not put HM Revenue & Customs in a position where it may have to make repayments of VAT where the corresponding tax on the purchase has not been paid.

The government's decision comes after the European Court of Justice ruled earlier in the month that innocent companies caught in a missing trader value added tax fraud chain cannot be held liable for the unpaid tax.

The three companies involved in the case, Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd, were exporters of computer chips who unwittingly became party to missing trader fraud.

According to the ECJ, in a supply chain, "each transaction must be considered on its merits as a separate economic activity".

"The right of a taxable person to deduct VAT cannot be affected by the fact that, without that person knowing or having any means of knowing, another transaction in the chain is vitiated by fraud," the judges stated.

It is estimated that missing trader fraud cost the government between GBP1.1 billion and GBP1.9 billion in lost revenues during 2004/5.

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