UK Seeks Renewal Of Reverse Charge Derogation

by Robert Lee, Tax-News.com, London

21 April 2009

HM Revenue and Customs has announced that the UK government is negotiating with the European Union to allow the UK to continue to apply a reverse charge mechanism in respect of certain value-added tax transactions as a countermeasure to 'carousel' fraud.

The reverse charge for mobile phones and computer chips was implemented with effect from June 1, 2007 to remove the opportunity for fraudsters to use these goods to perpetrate carousel fraud, officially known as missing trader intra-community carousel fraud. As an exception to the normal accounting rules for VAT the UK has a derogation from EU law to apply this anti-fraud measure, which runs until April 30, 2009.

The European Council of Finance Ministers has agreed, in principle, to the renewal of the UK's derogation from the EU VAT Directive, which has allowed it to use the reverse charge mechanism, until April 2011. The UK government remains in negotiations with the European Commission and EU member states over the final legal texts, meaning that the April 30 deadline may be missed. However, HMRC has assured that the derogation would be applied retrospectively.

"If there is a gap, it is expected to be temporary as we expect that the extension of the derogation will apply retrospectively from May 1, 2009 resulting in an unbroken legal vires for the reverse charge. UK law will therefore remain unchanged," the department stated in a Customs and Revenue Brief.

HMRC stated that businesses making or receiving business-to-business supplies of mobile phones and/or computer chips with a value of GBP5,000 or more should continue to apply the reverse charge. Suppliers should also continue to complete and submit reverse charge sales lists for these supplies.

Businesses that apply the reverse charge and comply with UK law will not be subject to any penalties as a consequence of any temporary gap in the EU derogation, the department said. However, if a business does not apply the reverse charge during any temporary gap in the derogation, it may be liable to pay any tax lost or to have its input tax denied.

Despite growth in the overall figures, KPMG's Forensic Fraud Barometer, released on February 2, found that the government experienced a significant fall in its exposure to fraud, and this has been attributed to an intensified crackdown on carousel fraud – where VAT on items such as mobile phones is fraudulently claimed back.

The Exchequer lost GBP207m in fraud (in 56 cases) in 2008, down from GBP833m in 2007, with carousel fraud accounting for GBP115m of those losses in 2008, down from GBP700m in 2007.

Carousel VAT fraud within the EU occurs where a person or organisation liable for VAT uses specially-set up companies to import VAT-free goods from another EU country, which are then on-sold plus VAT to other companies in the same country. This second set of companies then re-exports the goods elsewhere in the EU, claiming rebates of the VAT they had been charged. The first batch of intermediary companies is then liquidated without paying the VAT they had supposedly collected.

Mobile phones, computer chips and other small, relatively high value items have been a favourite target of the carousel fraudsters.

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