Committee calls for moves to combat VAT fraud
25 May 07
Carousel fraud estimated at £4.75 billion in 2005-06
The House of Lords European Union Committee has called on the government to look again at how it deals with VAT fraud on goods imported from other EU states.
Since 1992, cross-border transactions within the EU have been zero rated for VAT. This means that importers of goods are able to receive them without paying VAT, and charge it on resale. If this VAT is not submitted to the revenue authority, the importer is committing "missing trader fraud". Goods are often repeatedly exported and then re-imported, an activity that is known as carousel fraud and something that cheated the taxman of an estimated £4.75 billion in 2005-06.
According to the committee, in a report published today, this type of fraud is only possible because of rules that EU members’ fiscal authorities have chosen to put in place for the taxation of trade within the EU.
Weakness of extended verification
Until this basic issue is addressed, it continues, attempts by the government to limit missing trader fraud by methods such as "extended verification” – a more detailed examination of VAT rebate requests on goods at high risk of being involved in the fraud – will have limited effect.
The report notes that the extended verification process may harm legitimate traders, who face delays when attempting to claim back VAT payments they have made in good faith.
The committee found that as extended verification is limited to certain high-risk products, fraudsters are already using goods not subject to the same stringent checks. They describe extended verification as an “inefficient and unsustainable use of HMRC resources", and as imposing "a significant burden on smaller firms”.
Pan-European approach
Rather than making changes at the margin of the VAT collection regime, the report calls for a pan-European radical approach to VAT charges that eliminates missing trader fraud.
The committee expects that, even with the "reverse charge" accounting mechanism to be introduced in June, carousel fraud will continue to grow.
They argue for a flat rate origin system where a VAT rate of 15% would be applied to all cross-border trades in the EU. Under this system, VAT charged by the exporter would be collected and kept by their own country and the refund would be given to the importer by its own government.
This would benefit net exporting countries and reduce tax revenues for net importers, but this effect would be minimised as VAT rates would be equal at 15% across the EU.
Call on Treasury
Baroness Cohen of Pimlico, who chairs the committee, said: "Missing trader and carousel fraud are major concerns for EU member states. The scale of the attack in the UK alone was estimated at £4.75bn in 2005-06: this is money which criminals are taking which could be used to fund schools, hospitals and other infrastructure.
"While we welcome the HMRC's attempts to tackle the problem, we are concerned that extended verification and the 'reverse charge' mechanism risk transferring the problem to other untargeted goods. Extended verification also imposes significant costs and inconvenience on legitimate business.
"We feel the time is now right for a more innovative solution to this problem. That could be best achieved with a Europe-wide consensus on how to move forward, and we call on HM Treasury to consider further a change in the way that VAT is charged on cross-border trades. We noted that the flat rate origin system seems well worth further examination."
The full report is available at: www.parliament.uk/parliamentary_committees/s_comm_a.cfm .