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France Backs VAT Reverse Charging In UK

by Robert Lee,, London

15 December 2006

UK Chancellor of the Exchequer, Gordon Brown has told MPs this week that France has lifted its objection to a proposal for VAT 'reverse charging' in the UK to combat widespread tax fraud.

The French government had objected to the UK's request to the European Commission to introduce reverse charging, arguing that it would merely shift 'carousel' VAT fraud to other countries and cause chaos and confusion within the EU's VAT system.

However, Brown told the Commons Treasury Committee on Wednesday that government officials had reached an agreement with their French counterparts that would clear the way towards the introduction of reverse charging.

According to Brown, the Treasury lost between GBP2 billion (EUR2.6 billion) and GBP3 billion in the year to last March as a result of carousel, or missing trader intracommunity (MTIC) fraud. He said that the new measures to tackle the problem would save about GBP500 million in 2007/08.

France, like many other EU member states, has also become a victim of carousel fraud, and Budget Minister Jean-Francois Cope announced on Wednesday that an investigation had been launched after the French authorities observed "unusual movements of goods" between France, the UK and Poland in the first half of the year. However, he dismissed reports that the fraud could involve sums of up to EUR19 billion as "fantastical".

Germany has also requested a derogation from the EU Sixth VAT Directive to introduce reverse charging.

In its simplest form, this type of fraud involves obtaining a VAT registration number in one EU member state for the purposes of purchasing goods free from VAT in another member state. The goods are then sold at a VAT-inclusive purchase price after which the perpetrator goes 'missing' without paying the VAT due.

In its more abusive form, the fraud involves the same goods being traded around contrived supply chains within and beyond the EU, re-entering member states on a number of occasions with the VAT being stolen each time - the so-called carousel.

Under reverse charge accounting, it is the responsibility of the purchaser, rather than the seller, to account for VAT on the transaction. By introducing this mechanism the UK wants to take VAT out of the supply chain and make it harder for criminals to defraud the system.

Goods covered by the reverse charge regime will include mobile telephones, computer chips/microprocessors/central processing units, electronic storage media, 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 the kind used with a television or computer.

Implementation of the reverse charge requires fundamental changes to the accounting systems of businesses trading in the relevant goods, but HM Revenue & Customs has promised to give businesses about eight weeks notice of its introduction.

Brown's announcement came a day after the latest dawn raids by UK tax investigators and police teams across Europe to break carousel fraud rings. The international operation saw over 300 HMRC criminal investigators deployed across four countries including France, Spain, Germany and the UK.

In the UK a total of 50 search warrants were executed at business and domestic addresses in London, Glasgow, the Midlands, Manchester, Dover, Bristol and South Wales.

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