VAT Directive to change to end carousel fraud

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The European Commission wants to amend the VAT Directive to help eradicate a kind of international VAT fraud that is estimated to have cost the UK exchequer up to £2 billion a year.

Carousel fraud is a form of what is known as Missing Trader Intra-Community (MTIC) fraud, though the terms are sometimes used interchangeably.

MTIC fraud is committed by obtaining VAT registration to acquire goods VAT-free from other Member States. The fraudsters then sell on the goods at VAT-inclusive prices and disappear without paying over the VAT paid by their customers to the tax authorities. In a carousel fraud, goods that have been imported into one Member State are sold through a series of transactions before being exported again to another EU Member State. They may then be re-imported back into the first Member State.

The UK Treasury estimated that in 2004-05 it lost between £1.2bn and £1.9bn to MTIC fraud.

Historically the fraud has most affected the sales of small but valuable electronics goods such as computer chips and MP3 players, but lately has also struck the market for the trading of greenhouse gas emissions.

The Commission put temporary 'reverse charge' measures in place at the end of last year but said that its changes to the VAT Directive were different to earlier proposed pilot schemes.

"Under a reverse charge mechanism, the supplier does not charge VAT but is accounted for by the customer who, if a fully taxable person, deducts this VAT at the same time," said a Commission statement explaining the move. "The need for an effective payment to the Treasury is therefore removed as well as the theoretical possibility to commit this type of fraud."

The Commission is keen, though, not to change fundamentally the way that the VAT system works, so is only instituting the reverse charge mechanism in the market for five goods: computer chips; mobile phones; precious metals; perfumes; and greenhouse gas emission allowances.

Taxation and Customs Commissioner László Kovács said that the aim of the proposed Directive was to ensure that action taken across the EU was consistent.

"VAT carousel fraud is against Member States' finances and they should have the means to combat it efficiently. However, actions taken against this fraud should be taken in a consistent manner across the EU and clear evaluation criteria should be established," he said.

The Commission said that its planned changes would be temporary and would offer countries the chance to select the areas from the five outlined to which they want to apply the changes.

"With this proposal, the Commission aims at providing the possibility for interested Member States to apply this targeted reverse charge mechanism in relation to a choice, from a pre-defined list, of goods and services which have been identified by Member States as sensitive to fraud," said the Commission in a statement.

"The experiences stemming from this temporary application of the sector-specific scheme should allow, on the basis of the foreseen information and evaluation procedure, an overall assessment of the usefulness and the proportionality of the sector-targeted application of reverse charge," it said.

The proposal can be read here (pdf).

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