New "reverse charge" mechanism will allow quicker response to VAT fraud, Commission says

The draft directive (10-page / 38KB PDF) creates a 'quick reaction mechanism' (QRM) allowing member states faced with serious cases of sudden and massive VAT fraud to implement an emergency "reverse charge mechanism", which would make the recipient rather than the supplier of goods or services liable for VAT. This new power would, the Commission said, "significantly improve" the chances of a member state being able to effectively tackle complex fraud.

"When it comes to VAT fraud, time is money," Tax Commissioner Algirdas Šemeta said. "Fraudsters have become quicker and cleverer in developing schemes to rob the public purse. We must strive to be one step ahead of them. The QRM will ensure that our system is sufficiently equipped to tackle VAT fraud effectively. It will help preserve much needed public revenues and create a fair and level playing field for honest businesses."

The Commission is also discussing the need for a pan-EU audit team made up of experts from national tax authorities, which it says could "facilitate and improve multilateral controls". In addition its 'Eurofisc' network, an information-sharing mechanism, was established last year and is due to produce its first reports shortly.

VAT fraud costs the EU and national budgets several billions euro every year, in some cases within a very short period of time, as a result of fast-developing complex fraud schemes. Between June 2008 and December 2009, the Commission said, an estimated $5bn was lost as a result of 'missing trader' (MTIC) fraud related to greenhouse gas emission allowances. MTIC fraud also affects electronic goods which are imported by fraudsters within the EU VAT free. VAT is then charged to customers, who then usually reclaim it. The fraudsters or "missing traders" then disappear without passing on the VAT to the tax authorities.

"The reverse charge mechanism is definitely a powerful anti-VAT fraud weapon in the hands of tax authorities," said Stuart Walsh of Pinsent Masons, the law firm behind Out-Law.com. "Less MTIC fraud should ensure that legitimate businesses in the supply chain are no longer called upon to make up for the loss suffered by HMRC at the hands of fraudsters."

Under the current rules if a member state wishes to take action against VAT fraud schemes that is not already provided for under EU VAT legislation, that state must formally request a 'derogation' from the European Commission. The Commission then draws up a proposal which must be unanimously adopted by EU member states before the measure can be implemented, delaying the state from taking the action necessary to stop the fraud.

If approved by the European Parliament and member states, the new QRM would grant a government the temporary power to set up a reverse charge mechanism within a month of making the request, which would then be valid for up to one year. This will, the Commission said, allow the relevant member state to take action immediately while a more permanent mechanism is being established. The QRM could also be used to authorise and establish other types of derogation to deal with possible new forms of fraud in the future, the Commission said.