Standard Report on the accounts of HM Revenue and Customs:
VAT missing trader fraud
Publication of 45th Report, Session 2006-07
Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
“Missing trader fraud, a scam by organised criminals exploiting arrangements for purchasing goods from other EU countries at VAT-free prices, is continuing to cost this country a colossal sum each year. The estimate for 2005-06 is some £2 billion to £3 billion. This is despite the Department’s efforts over the last six years or more to stem the flow.
“The UK applied for and is now allowed by the EU to apply the so-called ‘reverse charge’ mechanism - whereby VAT is removed from the business chain as cash and therefore cannot be stolen. However, it is ridiculous that this mechanism applies only to transactions involving mobile telephones and computer chips because the criminals can simply switch their attentions to others kinds of high value goods. I expect the Department to be vigilant and, as soon as this very real possibility materialises, to get back on to the EU to expand the scope of the mechanism.
“There has to be more coordinated working between EU Member States. But nothing short of a new legislative framework in the EU for administering VAT will enable us to prevent these gangs from stealing public money on such a scale.”
VAT missing trader fraud is a large scale criminal attack on the EU VAT system. The most serious form-known as Carousel Fraud-involves a series of contrived transactions, within and beyond the EU to create large unpaid VAT liabilities and fraudulent claims.
The Department has been tackling missing trader fraud for over six years, yet has failed to stem the flow of tax losses: the fraud has continued to cost the exchequer at least £1 billion a year. In 2005-06, the level of fraud increased to its highest level yet, with the estimated cash loss to the exchequer of between £2 to £3 billion.
There are no reliable or comprehensive EU wide estimates of the cost of this fraud because most member states have not produced estimates. The EU Commissioner for Taxation has estimated the annual loss from VAT Fraud across the European Union at £40 billion (€60 billion).
The Department has introduced a range of legal and operational measures to tackle the fraud. The fraudsters are, however, resourceful and react quickly to such measures. In February 2006, the Government sought from the European Union authority to apply a special measure-the “reverse charge”-derogating from the Sixth VAT Directive for a wide-range of electronic goods, including those currently associated with the fraud, such as mobile phones and computer chips. In principle, once in force, this measure would prevent fraudsters from receiving VAT on the sale of mobile telephones and computer chips and would eliminate the opportunity for the fraud. The Council of the European Union approved the derogation on 16 April 2007, but the Council’s decision only allows the Department to apply the “reverse charge” to commerce in mobile phones and computer chips, rather than the wider range of products than the United Kingdom had originally requested. The Government now expects that this narrower measure, combined with other operational interventions, will protect revenue of £50 million in 2007-08.
The reverse charge can only be a provisional measure pending a more comprehensive EU-wide solution. The Commission is in favour of VAT being charged on all intra-community transactions in the country of purchase thereby eliminating VAT free operations and the opportunity for the present type of missing trader fraud. The United Kingdom and some other Member States are not in favour of this system. The Department considers that it would open the way for major new frauds.
Individual Member States cannot tackle VAT fraud on their own. The Department recognises that it has to work closely with the tax authorities of other member states and third countries, as well as with the accounting, tax and legal professionals to tackle the problem effectively. Ultimately the European Union will have to agree a new legislative framework for administering VAT, if missing trader fraud is to be eliminated in the long term.