UK hopes to change VAT rules to beat carousel fraud

Out-Law News | 30 Jan 2006 | 2:48 pm | 1 min. read

The UK Paymaster General has asked the European Commission to approve a new strategy to tackle a VAT scam known as carousel fraud. The proposals would put the responsibility for collecting VAT on high-tech goods onto the purchasers of those goods.

The measure will target mobile phones, computer chips and other similar electronic items, which are frequently hit by the scam, also known as missing trader intra-Community (MTIC) fraud.

Crooked traders obtain VAT registration to acquire goods VAT-free from other Member States. They then sell on the goods at VAT inclusive prices – and disappear without paying over the VAT paid by their customers to the tax authorities.

The fraud reportedly costs the UK over £1 billion per year.

Recently, UK authorities have taken action against the fraud by considering all the transactions in a chain of supply involving a missing trader or a hijacked VAT number and refusing to repay VAT to any company involved in that chain of supply.

However, the European Court of Justice ruled earlier this month that such an approach was contrary to EU VAT laws, and the UK Government has since been seeking another way to tackle the problem.

It has now asked that the UK be permitted to opt out of certain provisions of the EU Sixth VAT Directive in order that it can introduce what is known as a reverse charge procedure for transactions between VAT-registered businesses in certain goods.

Under this procedure, the suppliers of the goods do not account for the VAT on their sales when selling to other VAT-registered businesses. Instead, it is the responsibility of the purchaser of the goods to account for the VAT, although they can recover this VAT in the normal way.

This means that HM Revenue & Customs (HMRC) is not put in a position where it may have to make repayments of VAT where the corresponding tax on the purchase has not been paid to HMRC, says the Government.

"The introduction of the reverse charge is one of many measures designed to thwart MTIC fraud by taking the criminal profit out of the transactions,” said Paymaster General Dawn Primarolo MP.

"MTIC is not a phenomenon unique to the UK but also affects other European Union Member States and we continue to work closely with our European partners,” she added. “I hope that the Commission and other Member States will look favourably on our request, and that the UK can implement the proposed changes as soon as possible.”