Embargo: Friday 25 May 2007
Contact: Owen Williams 020 7219 8659


The House of Lords European Union Committee have today called on the Government to look again at how it deals with VAT fraud on goods imported from other EU states.

Since 1992 cross border transactions within the EU have been zero rated for VAT. This means importers of goods are able to receive them without paying VAT and then charge it on resale. If this VAT is not the submitted to the revenue authority the importer is committing Missing Trader Fraud. These good are often repeatedly exported and then re-imported giving the activity its more common name, Carousel Fraud. The scale of the attack on Government revenue was estimated to have been £4.75bn in 2005/06.

The Committee point out that this type of fraud is only possible due to rules that EU members' fiscal authorities have chosen to implement for the taxation of trade within the EU. They argue that until this basic issue is addressed, attempts by the Government to limit missing trader fraud by methods such as "extended verification" - a more detailed examination of VAT rebate requests on goods at high risk of being involved in the fraud - will have limited effect.

The report notes that the extended verification process may harm legitimate traders who are facing delays when attempting to claim back VAT payments they have made in good faith. The Committee found that as extended verification is limited to certain high risk products fraudsters are already diverting their attention to goods not subject to the same stringent checks. The report states that extended verification is an 'inefficient and unsustainable use of HMRC resources and does impose a significant burden on smaller firms'.

The report recommends that rather than making changes at the margin of the VAT collection regime there needs to be a pan European radical approach to VAT charges that eliminates missing trader fraud. The Government's preferred solution - a "Reverse Charge" accounting mechanism, to be introduced for certain products on 1 June, will not solve the problem. The Committee expect that, even with the "reverse charge", Carousel Fraud will continue to migrate and mutate.

The Committee argue that they can see clear benefits in a flat rate origin system where a VAT rate of 15% would be applied to all cross border trades in the EU. Under this system VAT charged by the exporter would be collected and kept by their own country and the refund would be given to the importer by its own government. This would benefit net exporting countries and reduce tax revenues for net importers but this effect would be minimised as VAT rates would be equal at 15% across the EU. The Committee argue only a radical change to the way VAT is charged across Europe will significantly reduce missing trader fraud.

Commenting Baroness Cohen of Pimlico who chairs the Committee, said:

"Missing trader and carousel fraud are major concerns for EU member states. The scale of the attack in the UK alone was estimated at £4.75bn in 2005/06: this is money which criminals are taking which could be used to fund schools, hospitals and other infrastructure.

"While we welcome the HMRC's attempts to tackle the problem we are concerned that extended verification and the "reverse charge" mechanism risk transferring the problem to other untargeted goods. Extended verification also imposes significant costs and inconvenience on legitimate business.

"We feel the time is now right for a more innovative solution to this problem. That could be best achieved with a Europe wide consensus on how to move forward and we call on HM Treasury to consider further a change in the way that VAT is charged on cross-border trades. We noted that the flat rate origin system seems well worth further examination."

Notes to Editors

1. The Report is published by The Stationery Office, Stopping the Carousel: Missing Trader Fraud in the EU, House of Lords European Union Committee (Sub-Committee on Economic and Financial Affairs), 20th Report of 2006/7, HL Paper 101.

2. The full report will be available shortly after publication at:

3. The members of the committee who conducted the inquiry are:
Baroness Cohen of Pimlico (Chair)
Lord Kerr of Kinlochard
Lord Blackwell
Lord Maclennan of Rogart
Lord Cobbold
Lord Steinberg
Lord Giddens
Lord Trimble
Lord Inglewood
Lord Watson of Richmond
Lord Jordan

For copies of the report or to request an interview with Baroness Cohen please contact Owen Williams on 020 7219 8659.