HMRC Prepares To Counter Carousel VAT Fraud

by Amanda Banks, Tax-News.com, London

21 July 2006

The UK's HMRC has announced changes to VAT 'reverse charge' accounting rules, in expectation that the EU will allow an aggressive response to 'missing trader' or 'carousel' fraud.

The changes will affect businesses buying and selling any of the following goods:

• mobile telephones;
• computer chips/microprocessors/central processing units;
• electronic storage medium which may be used in, or in connection with, computers, or any device in categories 1 and 4;
• electronic devices used for the storage, processing or recording of electronic data, including handheld devices for recording or playing of sound and or images, handheld computers, handheld communication devices other than mobile telephones, positional determination devices for GPS system, games consoles with screen, or of a kind used with a television or computer.

Missing trader intra-community (MTIC) fraud, also known as carousel fraud, says HMRC, is a sophisticated criminal attack on the UK VAT system, which in 2004/05 is estimated to have cost between GBP1.12 and GBP1.9bn. The fraud is largely perpetrated using goods such as mobile phones and computer chips, but also includes other electronic goods. It involves goods imported VAT-free from other EU Member States being sold through contrived business-to-business transaction chains in the UK, and subsequently exported. The tax loss occurs when the VAT charged on the initial sale of the goods in the UK is not paid to HMRC because the seller disappears. The purchaser can still reclaim the VAT, so the loss crystallises when the trader who exports the goods from the UK makes a repayment claim.

Where the reverse charge applies, the seller no longer has to account for VAT to HMRC, so it will remove the opportunity to steal the VAT in business-to-business transactions within the UK.

Once the EU agrees to the change, the reverse charge will apply to sales within the UK where specified goods are purchased by a VAT-registered business for business purposes - sales to non-business customers are unaffected by the change, and normal VAT rules continue to apply. The relevant goods fall within the list mentioned above and will be specified in detail, in draft UK legislation, before the reverse charge is introduced. More detail on the precise scope will be available later over the summer.

Under the reverse charge procedure, the purchaser of the goods, rather than the seller, will be liable to account for the VAT on the sale. The supplier will not charge VAT, but will have to specify on the invoice that the reverse charge applies. Provided that the purchaser has correctly accounted for the VAT under the reverse charge procedure, he will retain the right to input tax recovery, subject to the normal rules.

In order to minimise the impact of VAT-registered customers on retailers, there will be a de minimis limit of £1,000, exclusive of VAT, below which the reverse charge will not apply. Normal VAT accounting rules will apply to transactions below this limit. There will be measures to prevent manipulation of this de minimis limit.

In order to enable HMRC to ensure that the reverse charge mechanism does not lead to any new revenue losses, there will be a requirement for suppliers to submit a reverse charge sales list to HMRC (similar to EC Sales Lists) listing customer and transaction details where the reverse charge has been applied. The exact details of this reporting requirement will be set out in secondary legislation and will be informed by discussions with businesses over the summer period.

HMRC expects to be implementing the new rules as early as October 2006, but this is dependent on progress within the EU. In the meantime, there will be an intensive series of briefings for businesses likely to be affected.

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