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Value Added Tax: EU proposals for reform and the implications of Brexit Contents

4VAT fraud: cooperation between tax administrations

Committee’s assessment

Legally and politically important

Committee’s decision

Not cleared from scrutiny; further information requested

Document details

Amended proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in the field of value added tax

Legal base

Article 113 TFEU; consultation procedure; unanimity

Department

Treasury

Document Number

(39299), 14893/17 + ADD 1–2, COM(17) 706

Summary and Committee’s conclusions

4.1Countries across the European Union experience significant evasion of Value Added Tax (VAT), due to fraudsters exploiting a loophole in the EU’s common system of VAT for cross-border sales of goods (so-called “missing trader” fraud). The European Commission has estimated that VAT lost to this type of fraudulent activity to amount to €50 billion (£44 billion) annually, including approximately €5 billion (£4.4 billion) of losses to the UK Exchequer.

4.2Administrative cooperation between EU countries to tackle VAT fraud is currently governed by Regulation 904/2010.125 It enables Member States to provide assistance to each other on individual taxpayers to correctly assess, control and collect VAT. It provides for exchange of information, some of which is automatic—for example relating to the VAT Information Exchange System (VIES), which contains information on businesses involved in intra-EU sales of goods and services—and some of which is on request, or at the initiative of the sending tax authority.

4.3As part of a package of measures of reform of Value Added Tax in the EU,126 the European Commission in November 2017 tabled a proposal amending Regulation 904/2010, to reduce opportunities for VAT fraud. The main objective of the Commission proposal is to amend this legislation to establish a clear legal basis for a new analytical tool, the Transaction Network Analysis (TNA). This application, already operating on a voluntary basis between 25 Member States (but not the UK), provides tax authorities with automated analysis of intra-EU supplies to detect VAT fraud, drawing on information submitted to the EU’s existing VAT Information Exchange System (VIES) by the Member States.127

4.4In addition, the Commission has proposed various other changes, including improved access for tax authorities to information on car sales and non-EU imports benefiting from a VAT suspension in other Member States (both areas affected by widespread VAT fraud, though with far lower revenue losses than “missing trader” fraud). We have set out the substance of the proposals in more detail in paragraphs 4.31 to 4.40 below.

4.5The Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the proposal in February 2018.128 He expressed the Government’s support for the proposed changes, provided they “do not encroach on the competence of Member States to run and administer their national VAT systems”. The Memorandum does not make clear why the Government has not so far participated in the TNA tool, and what its view is on that element of the proposed Regulation.

4.6The Committee welcomes the momentum behind tackling VAT fraud based on the EU’s current system of taxation on cross-border supplies. However, it remains unclear to us why the Government is opposed to joining the TNA project for automated analysis of trade flows to detect VAT fraud, and the Minister’s Explanatory Memorandum provides no further clarity in this respect. We therefore ask the Minister to explain:

4.7We also consider that this proposal, and the EU legal framework for administrative cooperation between tax authorities more broadly, are important for the UK despite its exit from the EU for two reasons.

4.8Firstly, during the post-Brexit transitional period, the UK would remain part of the EU’s common VAT area as all EU law will continue to apply. As such, the Government would remain bound by the obligation to share information with EU countries under Regulation 904/2010, and have the right to receive information in return. It also means it will have to apply these proposed changes to the Regulation if they become applicable during that period.

4.9In this respect, we are particularly concerned about the implications of the UK’s loss of its veto over tax-related proposals when it exits the EU on 29 March 2019. There is clearly a risk that the substantial changes being proposed to the VAT system by the Commission, of which this proposal on administrative cooperation is only one part, could be adopted against the Government’s wishes. Depending on their implementation time, the UK may have to apply these changes to its domestic system of VAT regardless of the fact it was no longer an EU Member State.

4.10As we have set out in the chapter of this Report on the ‘definitive VAT’ proposals, we remain to be convinced that the Government’s general safeguards against the application of unwanted EU legislation during the transition—namely the fact that the UK will have voiced its opinion129—on proposals pending before March 2019, or the legal mechanism for resolving these concerns found in Article 123(7) of the draft agreement,7—will be effective in practice. Moreover, any unilateral rejection by the UK of changes to the VAT Directive or its supplementary legislation affecting cross-border trade could be severely disruptive to trade, given the reciprocal and symmetrical nature of the system, including the mechanisms for administrative cooperation under Regulation 904/2010.

4.11Secondly, the Government’s desired post-transition relationship with the EU on matters of value added tax remains entirely unclear. The closer the level of economic integration, the greater the presumed need for a continued mechanism of formalised cooperation to combat VAT fraud.

4.12This is particularly true in the context of the Government’s ambition of an Irish border free of any physical customs infrastructure. Outside the common VAT area, value added tax is collected on import. In the absence of systematic monitoring of goods coming into the UK, the Government would presumably have to remain part of, or functionally replicate, the VAT cooperation mechanisms laid down in Regulation 904/2010 to ensure it was aware of movements of goods into the UK on which VAT needed to be levied. That, in turn, would require the UK to effectively remain in the single EU VAT area to avoid instances of double- or non-taxation that could arise if the Government changes domestic rules about when VAT liabilities arise and who is responsible for VAT returns.

4.13So far, we have not received any detail from the Government about the hoped-for substance of any UK-EU cooperation agreement on VAT. In December 2017, we raised the example of a recent EU-Norway Agreement, which effectively includes Norway in most of the EU’s cooperation mechanisms in the field of VAT, as a possible template. In response, the Minister has only felt able to say that the Agreement is “useful”. While we may take this as a sign that it could form the basis for a future UK-EU treaty, we note that Norway remains outside the common VAT area; and that consequently Norwegian goods sold into the EU incur VAT at the moment of importation. The Agreement would therefore need substantial modification before it would meet the Government’s requirements in avoiding the need for customs infrastructure.

4.14We will continue to press the Government for clarity on these matters, given that it purports to want to start substantive trade negotiations with the EU in March without having publicly stated what the future agreement should look like, or how it proposes to resolve the potential for VAT evasion at the Northern Irish border if no frontier controls are in place. In the interim, we retain the proposal on administrative cooperation under scrutiny.

Full details of the documents

Amended proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in the field of value added tax: (39299), 14893/17 + ADD1–2, COM(17) 706.

Background

4.15In October 2017 the European Commission published a legislative proposal for a “definitive system” for applying VAT to cross-border sales within the EU, which aims to tackle the underlying causes of cross-border VAT fraud which costs EU governments €50 billion in lost tax revenues each year. We set out the details of this proposal in more detail in December 2017130 and provide an update on the Government’s position in a separate chapter in this Report.

4.16While negotiations on that file are on-going within the Council, the Commission has also tabled a number of supplementary proposals, including a new Regulation to reinforce administrative cooperation between the EU’s tax authorities, with the aim of addressing the most common forms of VAT fraud under the current system.131 This new legislation also aims to prepare the ground for the greater degree of trust between national tax authorities as foreseen by the proposed new VAT system, under which Member States would collect VAT revenue for each other in certain circumstances.

4.17Below, we have set out in more detail the background to the proposal; the types of fraud it is seeking to address; and the substance of the changes proposed by the Commission.

The EU’s common system of VAT

4.18The EU has established a common system of value added tax (VAT) system which is currently governed primarily by Directive 2006/112/EC (the VAT Directive).132 For cross-border trade within the EU, the Directive stipulates that VAT must be paid in the Member State where a goods or service is supplied, which ordinarily means in the country where the customer is based or takes possession of the goods.133

4.19Prior to the abolition of customs controls as part of the establishment of an internal market in 1993, a trader who imported a product from another EU country would have to pay VAT to their national customs authorities before the good could be released. When such controls were removed, the Member States introduced—on a supposed transitional basis—a new system for cross-border business-to-business sales. In practice, the current, complex arrangement means a cross-border sale is split into two transactions: a zero-rated supply in the Member State of the supplier of the goods (meaning the exporter obtains a rebate of all their input VAT, and the customer is not charged any VAT), and an “intra-Community acquisition” in the Member State of destination (meaning that, as a second step, the importer effectively charges themselves VAT and pays it to their national tax authority).

Cross-border VAT fraud

4.20While this system allowed for the abolition of intra-EU customs controls, it has also provided opportunities for three main types of VAT fraud, which are centred on the ability of traders to make a purchase with a zero-rate of VAT from another EU country:

Administrative cooperation to tackle VAT fraud

4.21An EU-level legislative framework for administrative cooperation on value added tax was created in 1992,138 in recognition of the potential difficulties posed by the elimination of customs controls on intra-EU movement of goods.139 The Regulation on Administrative Cooperation was comprehensively revised in 2003140 and again in 2010.141

4.22Under the terms of the Regulation as it stands, Member States provide assistance to each other to correctly assess, control and collect VAT. It provides for exchange of information, some of which is automatic—for example relating to the VAT Information Exchange System (VIES), which contains information on businesses involved in intra-EU sales—and some of which is on request or at the initiative of the sending tax authority.

4.23Exchange of information on request on VAT matters often requires a so-called “administrative enquiry”,142 where the tax authority of one EU country asks its counterpart in another EU country to obtain information that may help assessing the VAT liability of a particular taxpayer. The Member State receiving the query can make inquiries with any relevant businesses, acting for the other Member State as if it were acting on its own behalf. Officials from the other EU country may also request to be present during any on-site visits.

4.24Regulation 904/2010 also created “Eurofisc”, a mechanism to improve cooperation in combating organised VAT fraud, and especially missing trader fraud. It is a network of tax officials, allowing tax authorities to exchange the results of their analytical work in identifying VAT fraud on an ad hoc basis. It has several “working fields”, including for the three main types of VAT fraud affecting intra-EU sales (see paragraph 4.20 above). While all EU Member States are represented in Eurofisc, each individual country decides how to contribute to a Working Field on a voluntary basis.

4.25These efforts notwithstanding, the European Commission143 and the European Court of Auditors144 are of the view that the Member States’ instruments for administrative cooperation in the EU must be “put to greater and better use”. In particular, the Commission has concluded Regulation 904/2010 falls short of its full potential because some relevant data (for example on car registrations used in second-hand car fraud) is not automatically swapped; EU-level law enforcement bodies do not receive information available to national authorities; and the ad hoc exchange of information on fraud patterns and risks via Eurofisc is labour-intensive and slow.

Moving to a “definitive system” of Value Added Tax

4.26Given the scale of VAT fraud made possible by the EU’s current common system of VAT for cross-border sales despite the existing mechanisms for cooperation, and in recognition of the system’s complexities, the European Commission published a VAT Action Plan in April 2016. This contained short and medium-term measures to modernise the EU VAT system and make it “simpler, more fraud-proof and business-friendly”.145

4.27The key measure outlined in the Action Plan was an amendment to the VAT Directive for a “definitive system” of value added tax.146 First and foremost, this envisaged amendment to the VAT Directive would restrict (but not eliminate) the opportunities for zero-rated cross-border purchases by ordinarily making the supplier—not the customer, as at present—liable for ensuring VAT was paid to the tax authority of the Member State of consumption.147 In addition—to reduce the resulting administrative burden on suppliers—the proposal would also allow traders to pay VAT due in another EU country to their national tax authority, via an accounting mechanism known as the “One Stop Shop” (OSS).148 Revenue collected via the OSS which would then be remitted to the Member State of the customer.149

4.28In October 2017 the Commission tabled a proposal to legislate for the principle of such a change, with further detailed legislative measures to follow in 2018. The Committee considered these changes to the VAT Directive separately in December 2017.150 In light of information we have received from the Treasury since, we consider the Government’s position on the “definitive system” again in a separate chapter of this Report. Negotiations on the overarching proposals to change VAT on cross-border sales within the EU remain under discussion in the Council, with consideration by EU Finance Ministers currently scheduled for the May 2018 ECOFIN Council. They are not expected to be adopted until 2019 at the earliest, with entry into force in 2022 or later.

4.29Given this long lead-in time for the reforms, opportunities for missing trader fraud and other types of VAT evasion are likely to persist for some time. As a result, the Commission took the view that shorter-term measures would also be necessary to scale back the levels of cross-border VAT fraud. In November 2017 it therefore also tabled draft legislation to improve the exchange and analysis of information by tax administrations (governed by Regulation 904/2010). The proposal also aims to further improve trust between the EU’s national tax authorities, in preparation for the foreseen expanded use of the One Stop Shop for cross-border B2B supplies. That system will require a substantial degree of confidence between the Member States because they would effectively have to trust another country to collect a large source of tax revenue on its behalf and remit it correctly.151

4.30The Commission proposal technically modifies a pending legislative proposal to amend Regulation 904/2010, on the introduction of the Certified Taxable Person as part of the “definitive VAT system”.152

The Commission proposal

4.31The Commission has now proposed to amend Regulation 904/2010 to address these perceived shortcomings. They would enter into force in three different stages, depending on the level of preparatory work required. We have summarised the substance of the Commission proposals below.

Eurofisc

4.32Within Eurofisc, the European Commission and most Member States are already developing a voluntary tool for information exchange and joint processing of VAT data for called Transaction Network Analysis (TNA). Although the TNA does not expand the types of information exchanged via Eurofisc, it would reduce the amount of manual labour involved in such exchanges by introducing automatic data collection, for example through VIES. The tool also seeks to improve ways of detecting VAT fraud early by mining this data in a systematic way.

4.33Twenty-five Member States are currently participating in the Eurofisc Working Field related to the development of the TNA tool, with Germany and Slovenia having observer status. The UK is the only Member State not involved in this Working Field, with the Government having taken the view within Eurofisc that it needs a “clearer legal framework in order to participate”.153 The Commission is therefore proposing to amend Regulation 904/2010 to provide a clear legal basis for joint processing and analysis of data within Eurofisc through the TNA. Although participation by Member States in such activities would remain voluntary, where a Member State joins the TNA Working Field, its authorities should grant Eurofisc officials access to their VIES data on intra-Union transactions.

4.34The Commission has also asked non-participating Member States (i.e. Germany, Slovenia and the UK) to grant such access, to allow the software to “identify all potential fraud networks, including those involving traders established in non-participating Member States”. The amendments would also allow Eurofisc officials to coordinate administrative enquiries initiated by Member States in response to the risk analyses produced by this new tool.154 In addition, the network would be allowed to forward information on VAT fraud trends, risks and serious cases to Europol and the European Anti-Fraud Office (OLAF). Its officials would also be permitted to disclose information on such cases to the European Public Prosecutors’ Office (EPPO).155

4.35The Minister’s Explanatory Memorandum does not refer to the UK’s current status as a non-participant and non-observer in the TNA working party, or explain the Government’s reasons for having taken this position.

Exchange of information on imports and car registrations

4.36In response to the levels of fraud committed using customs procedures 42 and 63 and the dual VAT regime for cars (see paragraph 4.20 above), the Commission proposes to allow for automated access to each Member State’s databases on vehicle registrations and on imports from outside the EU where VAT is suspended while the goods are transported to the Member State of destination. These new access requirements would become applicable in January 2020.

4.37With respect to vehicle registrations, the Commission proposes to grant national tax authorities access to the EUCARIS platform, where automated information exchange on vehicle registrations between EU Member States already takes place.156

4.38As regards imported goods for onward supply under customs procedures 42 and 63, the proposal seeks to ensure that the customs authorities of the Member State of import would share information—on the consignment, the VAT numbers of the importer and the intended recipient—with the tax authorities of the declared Member State of destination. This would allow the tax authorities in both countries to cross-check this information with the information reported by the importer in their eventual recapitulative statement and VAT return, and by the recipient in his VAT return. This would also allow the Member State of destination to inform the customs authorities of in the Member State of import if the VAT number for the recipient business has been ‘hijacked’.157

4.39In addition, the amended Regulation would allow all EU customs authorities to access VIES to ensure that the VAT identification numbers of the importer and the recipient of the goods are valid before authorising a VAT suspension under customs procedure 42 or 63. The Commission notes that such access is already available to the customs authorities of 23 Member States, and would therefore only have the effect of forcing the remaining five EU countries to follow suit.158

Other changes

4.40The proposal to amend Regulation 904/2010 would make a number of supplementary changes, namely:

The EU-Norway Agreement on cooperation in VAT fraud

4.41The EU is not only seeking to strengthen cooperation on tackling VAT fraud between its Member States. In its 2012 Action Plan on tax fraud, the Commission also outlined the need for new EU-level agreements with non-EU countries used by organised crime groups to perpetrate VAT fraud, in particular Norway, Russia, Canada, Turkey and China.

4.42The talks with the latter four countries are apparently on hold. However, in spring 2017 the European Commission concluded two years of negotiations with Norway—which is part of the Single Market but not bound by EU VAT law—and submitted it to the Member States for formal signature and conclusion (ratification) in October. The new treaty in effect includes Norway in the systems created by Council Regulation 904/2010 and Council Directive 2010/24/EU to Norway, including Eurofisc. However, Oslo will not be given access to the Member States’ national VAT databases, nor the EU’s VAT Information Exchange System (VIES) on intra-EU supplies.

4.43The Committee cleared the Agreement from scrutiny in December 2017, but asked for further information from the Minister about its value as a template or basis for a future UK-EU cooperation agreement on VAT fraud after Brexit.163 The Financial Secretary replied on 8 February,164 stating that:

Previous Committee Reports

None with respect to the Eurofisc proposal. For the Committee’s previous consideration of the EU-Norway VAT Agreement, see: (39175), 13774/17 + ADD 1, COM(17) 624: Fourth Report HC 301–iv (2017–19), chapter 15 (6 December 2017).

125 Council Regulation 904/2010.

126 The other proposals in the package concern the place of taxation for intra-EU supplies of goods and services; the restrictions on EU countries when setting VAT rates; and a special scheme that alleviates the administrative burden of VAT for small businesses. We have considered these in separate chapters in this Report.

127 Each national tax authority in the EU, including HMRC, maintains an electronic database containing the VAT registration data of its traders (.e.g. the VAT identification number, name and address, and supplies made to other EU countries). The EU’s VAT Information Exchange System (VIES) was set up to allow for that data to be exchanged, in order to enable VAT administrations to monitor and control the flow of intra-EU trade in goods to detect irregularities.

128 Explanatory Memorandum submitted by HM Treasury (8 February 2018).

129 On 9 October 2017, the Prime Minister told the House: “Given the way things operate, it is highly unlikely that anything will be brought forward during that period that has not already started discussions through the European Union to which we are being party of until we leave and on which we would have been able to say whether they would be a rule that we would sign up to or a rule that we would not wish to sign up to. Any new rules put on the table during the implementation period, given the way these things operate, are highly unlikely to be implemented during the implementation period.”

130 See for more information our Report of 6 December 2017.

131 The other supplementary proposals would affect restrictions on VAT rates and the VAT obligations of small businesses. We have discussed these in separate chapters in this Report.

132 European Commission, “Cross-border VAT“ (accessed 5 January 2018).

133 The Directive however contains various exemptions to this general principle, for example, where services are supplied to a consumer (in which case VAT is normally paid in the Member State of the supplier irrespective of the location of the customer).

134 €1 = £0.88415 or £1 = €1.13103 as at 28 February.

135 In 2015, there were 8.5 million import transactions across the EU with a VAT exemption under CPs 42 and 63, with a total value of €74 billion (£66 billion). The cost of this type of VAT fraud has not been quantified.

136 See our Reports of 29 November 2017 and 24 January 2018 for more information on EU investigations into VAT and customs fraud in the UK. On 8 March, the European Commission formally called on the UK to compensate the EU for losses to the EU budget from the UK’s failure to collect customs duties and VAT on imports.

137 Commission Impact Assessment, p. 20.

138 Regulation 218/92 on administrative cooperation in the field of indirect taxation (VAT).

139 See paragraph 0.18 for more information on the creation of the current VAT system.

140 Council Regulation (EC) 1798/2003.

141 Council Regulation (EU) 904/2010.

142 The Regulation defines “administrative enquiries” as “all the controls, checks and other action taken by Member States in the performance of their duties with a view to ensuring proper application of VAT legislation”.

143 European Commission report on the application of Council Regulation (EU) no 904/2010 (COM(2014) 71, 12 February 2014). Considered by the previous Committee on 19 March 2014.

144 European Court of Auditors report 2015/24, “Tackling intra-Community VAT fraud: more action needed“ (March 2015).

145 European Commission document COM(2016) 148. Cleared from scrutiny by debate in European Committee B on 21 February 2017.

146 Other measures announced in the Action Plan include the B2C e-commerce VAT package (see our Report of 24 January 2018), adopted by the Council in December 2017 and reform of the EU’s system of VAT rates (which we consider elsewhere in this Report).

147 The Commission proposal also seeks to introduce the legal concept of a “Certified Taxable Person” (CTP). In the context of the transition to the “definitive system” of VAT, where a buyer has CTP status, they would remain liable to account for VAT on cross-border purchases, in derogation from the proposed principle that the supplier should have that responsibility.

148 As the details of the changes to the VAT system are yet to be decided, it is unclear whether UK-based businesses will be able to make use of the OSS for sales into the EU after Brexit.

149 At present, an embryonic version of the OSS (known as the “Mini One Stop Shop”) is used only by traders who supply electronic services to consumers based in another EU country. See our Report on the B2C e-commerce VAT package of 24 January 2018 for more information on the Mini One Stop Shop. The Mini One Stop Shop can also be used by non-EU traders, who have to register for VAT in an EU Member State to make use of it.

150 See Report of 6 December 2017.

151 In 2015, Value Added Tax raised slightly more than €1 trillion (£880 billion) across the EU, representing 17.6 per cent of total national tax revenues in the Union (see Eurostat).

152 The new concept of a ‘Certified Taxable Person’ is in essence a business certified as a reliable taxpayer by their national tax authority. The earlier proposed amendment to Regulation 904/2010 would allow such certification, once granted, to be entered into the VAT Information Exchange System so all Member States can see which businesses hold CTP status.

153 See Commission document SWD(2017) 428, p. 38.

154 See paragraph 4.23 for more information on administrative enquiries.

155 The EPPO will have an interest as it will investigate and prosecute crimes affecting the EU’s financial interests. A small proportion of each EU country’s VAT receipts are passed to the European Commission to finance the EU budget, meaning that VAT fraud affects the EU’s financial interests by reducing this revenue stream.

156 EUCARIS is the European car and driving licence information system. All EU countries participate in it under Council Decisions 2008/615/JHA and 2008/616/JHA.

157 “Hijacking” of VAT numbers occurs where a valid VAT number is used but the identified business is not the real customer.

158 See Commission document SWD(2017) 428, p. 44.

159 Both the EU-level rules on VAT rates and special VAT exemptions from small businesses are subject to separate amending proposals, which we have considered elsewhere in this Report.

160 See http://ec.europa.eu/taxation_customs/tic/public/index.html.

161 Where an EU-based company incurs a business expense in another EU country and therefore pay VAT at the rate of the supplier’s country, they can get the VAT refunded in the same was as VAT on domestic business expenses or intra-EU acquisitions (input VAT) can be offset against output VAT on a domestic VAT return. This is because VAT is a neutral tax throughout the supply chain, in the sense that the total VAT charge should only be paid by the final consumer. See Directive 2008/9/EC for more information.

162 At present, the Member State where the business is established can ask the Member State where the business expenses were incurred to “recover” the VAT refund, to pay off VAT liabilities in the country of establishment. Alternatively, where the VAT liabilities are disputed, they can be seized as a “precautionary measure”. However, the procedures for this is cumbersome and the business involved can only legally challenge seizure of the VAT refund before the courts of the Member State of refund, not of their home country.

163 See the Committee’s Report of 6 December 2017.

164 Letter from Mel Stride to Sir William Cash (8 February 2018).



3 April 2018