Without waiting for new rules on 'reverse charge' VAT procedures to take effect, the UK's tax authority has stopped paying out VAT refunds in cases of possible 'carousel' fraud - and traders facing ruin are about to sue the government.
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.
It is these repayment claims that HMRC has frozen, while it investigates each and every one of them to winnow out the fraudulent cases. The traders say that they engage in multiple transactions in order to arbitrage price differences in the European market, and are therefore making very small percentage profits. Most of them have limited capital, and may even - quite legitimately - be using refund monies as capital, so that HMRC's refund suspension will quickly kill them.
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:
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. It will also remove the opportunity to use refunds as short-term finance.
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.
Official trade figures have revealed a massive increase in value-added tax fraud in the UK in the three months to the end of June 2006.
According to the UK's Office for National Statistics, almost GBP10 billion (EUR14.8 billion) of the country's exports were associated with Missing Trader Intra-Community fraud (MTIC), or carousel fraud, in the second quarter of the year, up 50% compared to the first quarter.
Carousel fraud has now reached such proportions that it is distorting the UK's trade data. Raw trade data suggested the the UK's exports rose by 39% year-on-year in the second quarter, but when the ONS factored out possible MTIC fraud, this falls to a 12% increase.
In its quarterly inflation report last week, the Bank of England also complained that carousel fraud makes it "extremely difficult" to accurately assess trade flows.
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 HM Revenue & Customs 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.
However, MTIC is a European concern, and some estimates have put the total loss of VAT within the EU at EUR50 billion annually. This has prompted some European governments, including the UK, Germany and Austria, to seek permission from Brussels to change VAT regulations to apply 'reverse charging' under which the purchaser of the goods, rather than the seller, will be liable to account for the VAT on the sale. So far only the UK has been given permission to change its rules to combat the fraud.
Momentum for action to combat the problem is also growing within the European Commission. In a paper published earlier this year, Taxation Commissioner Laszlo Kovacs presented some radical proposals to counter carousel fraud, but it is thought the EC will take a more conservative approach to the problem by enhancing administrative cooperation and improving safeguards in the current system.
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