EC Set To Give UK Go Ahead To Combat VAT Fraud

by Robert Lee, Tax-News.com, London

14 July 2006

The European Commission is reportedly set to grant the United Kingdom permission to change the way it charges value added tax on items such as mobile phones and computer chips in a bid to help the country clamp down on carousel fraud.

According to a report by The Times, EC Commissioner for Taxation Laszlo Kovacs will give the UK the green light to amend its VAT legislation "in the next couple of weeks."

In January, Paymaster General, Dawn Primarolo announced 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, typically small, high value electronic equipment such as mobile telephones and computer chips.

Missing trader fraud, also known as 'carousel fraud', involves the importation of goods 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. These goods may then be passed along a chain of traders which claim back the VAT, compounding the loss for the government.

The incidence of this crime has grown rapidly in recent years, aided by the fact that it is hard to trace the original perpetrators. Some fraudsters have also recently begun to export goods to countries outside of the EU, such as Dubai and Switzerland, before reimporting them back to EU member states and sending them round the carousel another time.

In 2004/2005, the UK estimated that the fraud cost between GBP1.2 billion and GBP1.9 billion; but as an indication of the rapid growth of the crime, some estimates put the cost of the fraud to the UK government this year at GBP10 billion (EUR14.5 billion) and to European Union governments as a whole at EUR50 billion.

The move by the UK to amend its VAT rules is, however, only likely to be a temporary measure, as Kovacs has announced a major review of EU VAT legislation with the aim of clamping down on fraud.

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