In the Media

Britain arms itself to stop VAT fraudsters escaping with billions

PUBLISHED July 11, 2006

Britain is about to be granted an important new weapon in the fight against carousel or "missing trader" fraud as it battles to stem losses amounting to billions of pounds a year.

Laszlo Kovacs, EU tax commissioner, told the Guardian that he is about to grant permission to HM Revenue & Customs to change the way it charges VAT on mobile phone and computer chip sales.

He added, though, that this was only an interim measure because Europe's VAT system was being wrecked by carousel fraud and would have to be overhauled. Carousel fraudsters import mobile phones from another EU country free of VAT, sell them on with the VAT added and then simply disappear without handing the VAT to HMRC. The goods often pass round a ring of traders, are re-exported and the VAT is reclaimed. This carousel can be spun many times, generating huge losses for the exchequer.

The VAT system is EU-wide and Britain cannot make unilateral changes. The UK applied to Brussels for a derogation to allow it to make VAT on phones and chips payable only when they are sold to a final user, such as a retailer. This is known as "reverse charge".

"Britain will get its approval in the next couple of weeks," Mr Kovacs said. "For the UK, this [derogation] is a temporary step, but not a complete solution."

The problem is that fraudsters have become more sophisticated, they are using computers to generate false trades and have spread their activities beyond phones and chips, something HMRC investigators are also concerned about. But a spokesman said HMRC was pleased: "We hope to be in a position to implement the reverse charge as soon as possible."

Mr Kovacs said carousel fraud was the EU's number one tax problem. "This is not surprising because it is so profitable."

While Britain and Germany are the only countries in the EU to have calculated their losses, Mr Kovacs said the rapid growth in British losses - now running at ?5bn a year - was probably being repeated across the EU, meaning losses could be ?50bn (?35bn) a year.

The scale of the problem means drastic action is required, although this is problematic because tax is a matter for individual states, meaning any changes need unanimous approval. "Member states will realise that if you let carousel fraud continue, there will be enormous and growing sums of money lost," Mr Kovacs said.

The first thing needed is improved co-operation between member states' tax authorities, and between them and those of non-EU countries, because carousels are often run through them. None of these require any law changes.

But what is really required is a root-and-branch reform of the bloc's VAT system to eliminate the need to reclaim VAT when goods cross internal borders.

This means adopting either a reverse charge scheme across the EU or a system whereby VAT is paid only at the point of entry into, or manufacture in, the EU.

Mr Kovacs prefers the second: "Reverse charge has the potential to eliminate carousel fraud, but there are other risks and potential costs to operators." But he stressed that an application by Germany and Austria for a derogation allowing them to introduce a reverse charge on all transactions more than ?5,000 was unlikely to succeed because such a change would need unanimity among EU members.

Philipp Mathies, a tax expert at German firm PSP, which has calculated Germany's carousel fraud losses, says reverse charge is a good idea. Germany is likely to continue to fight for it. Mr Kovacs added that it could be some time before the system gets overhauled. "It will take years rather than months," he explained, but he is optimistic he can achieve it during his remaining three-and-a-half years in the job