32Value added tax: generalised reverse charge
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Committee’s assessment |
Politically important |
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Cleared from scrutiny |
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Document details |
Proposed Council Directive to amend the VAT Directive as regards a generalised reverse charge mechanism |
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Legal base |
Article 113 TFEU, special legislative procedure, unanimity |
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Department |
HM Treasury |
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Document Number |
(38432), 15817/16 + ADDs 1–2, COM(16) 811 |
Summary and Committee’s conclusions
32.1The Commission has proposed a Council Directive to trial (in the value added taxation system) a generalised reverse charge mechanism to tackle missing trader intra-community (carousel) fraud. The mechanism would transfer the obligation to report a taxable transaction from the supplier to the buyer. The Government told us that it was supportive of such a scheme, but expressed a reservation about the Commission being empowered to issue and cancel Member State authorisations to use the mechanisms without unanimous Member State approval.
32.2In February 2017 we recognised the potential value of the proposed trial. But we kept the proposal under scrutiny, pending information about the Government’s efforts to secure Member State involvement in agreeing and rescinding authorisations to use the mechanism. We asked also about any Government plan for UK use of a reverse charge mechanism post-Brexit.
32.3The Government has told us now of support by a large majority of Member States for a Presidency compromise which would provide for unanimous Council endorsement of an authorisation for use of the mechanism and for unanimous Council rejection of a Commission decision to rescind an authorisation. The Government also said that it currently had no plans to introduce a generalised reverse charge post-Brexit.
32.4Given the probable resolution of the unanimity issue and the Government’s ability to veto the proposed Council Directive if that resolution does not materialise, we now clear the document from scrutiny.
Full details of the document
Proposed Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the temporary application of a generalised reverse charge mechanism in relation to supplies of goods and services above a certain threshold: (38432), 15817/16 + ADDs 1–2, COM(16) 811.
Background
32.5The EU has a common system of value added taxation, which in its present and earlier versions, is meant to be a temporary arrangement, pending Member State agreement on a permanent VAT system.
32.6In the context of its Digital Single Market and of its 2016 VAT Action Plan, the Commission presented a number of proposals for amendment of the VAT Directive, including in December 2016 this proposed Council Directive to introduce a time limited pilot scheme to trial a mechanism to tackle missing trader intra-community (carousel) fraud. The proposal would allow, subject to conditions, a Member State to be authorised by the Commission to use a generalised reverse charge mechanism, which would transfer the obligation to report a taxable transaction from the supplier to the buyer. It would also provide for the Commission to cancel authorisations if the mechanism was causing considerable negative impact on the single market, through an increase in VAT fraud in more than one Member States not using the facility.
32.7The Government told us that it was supportive of a time limited pilot scheme. However it expressed a reservation about the Commission being empowered to issue and cancel authorisations to Member States to use the mechanism, without Member State monitoring of the decision making process.
32.8In February 2017 we recognised the potential value of the proposed trial of a generalised reverse charge mechanism to combat carousel fraud. However, we noted the Government’s reservation about the Commission being allowed to issue and cancel authorisations for use of a mechanism concerning national taxation matters, without Member State monitoring of the decision making process. Therefore we kept this document under scrutiny, pending information about the Government’s efforts to secure Member State involvement in that process. We also asked that such information come to us well before a Council agreement on the proposed Council Directive was reached. We also asked to hear whether the Government envisaged any UK use of a reverse charge mechanism post-Brexit.
The Minister’s letter of 12 April 2017
32.9The Financial Secretary to the Treasury (Jane Ellison) first addressed the matter of the Government’s efforts to secure Member State involvement in the issuing and cancellation of authorisation for the use of a generalised reverse charge mechanism, saying that:
- it expressed reservations on this issue at the first technical discussion on the proposed Council Directive;
- in subsequent discussions, a number of Member States also expressed similar concerns, with the majority of Member States in favour of the Council retaining the authority to act, on a unanimity basis, to grant and repeal the authority to use a reverse mechanism;
- a small number of Member States instead supported the approach in the proposal to make the Commission responsible;
- ultimately they felt that in cases where a Member State’s use of the Mechanism had led to an increase in fraud in another Member State, the Commission could repeal authority to apply the mechanism much more quickly than would be possible under Council unanimity;
- the Council Legal Service was asked to consider possible approaches that would reconcile these two views;
- subsequently, in consultation with the Council Legal Service, the Presidency produced a compromise text that offered an alternative approach which would preserve the Council’s authority and the use of unanimity voting on tax decisions;
- under the compromise the Commission would make an assessment of a Member State’s application to introduce a generalised reverse charge mechanism;
- where it felt the qualifying criteria were met, the Commission would submit a proposal to the Council to be agreed on a unanimity basis;
- if a Member State felt that it was adversely affected by another Member State’s use of the mechanism, it would inform the Commission of the resulting increase in VAT fraud and could ask for the mechanism to be withdrawn; and
- in such cases the Commission would propose the repeal of the mechanism, which would be deemed to have been adopted by the Council unless Member States unanimously rejected the Commission’s repeal proposal within a set time.
32.10The Minister then commented that:
- the Presidency compromise would ensure that the Council retained authority on tax issues and that decisions would continue to be made unanimously;
- the use of ‘reverse unanimity’ would also ensure swift repeal of the mechanism in instances where its use had led to a shift in fraud; and
- similar reverse arrangements had been used previously in non-tax dossiers.
32.11The Minister told us that an orientation debate on the proposed Council Directive was held at the March 2017 ECOFIN Council, where Member States were asked their views on the approach proposed by the Presidency, with a large majority expressing support for it. She said also that the proposal was expected to go to the ECOFIN Council on 23 May 2017 for political agreement, following further technical level discussions this month.
32.12Turning to our question as to whether the Government envisaged any UK use for a reverse charge mechanism post-Brexit, the Minister said that:
- while departure from the EU might offer opportunities to reform parts of the UK tax system, the Government should aim to maximise certainty and clarity for businesses in every sector of the economy and to ensure a stable and smooth transition as the UK leaves the EU;
- reverse charge mechanisms were currently used by a number of Member States, including the UK, in targeted sectors where a risk of missing trader intra-Community fraud has been established; and
- while the Government continued to keep all taxes, including VAT, under review, there were currently no plans to introduce a generalised reverse charge.
Previous Committee Reports
Thirtieth Report HC 71-xxviii (2016–17), chapter 4 (1 February 2017).
27 April 2017