FOREWORD—What this report is about
Cross-border transactions within the EU have, since 1992, been zero-rated for Value Added Tax (VAT). Importers of goods are thus able to receive goods without paying VAT, but charge VAT on their resale. If the VAT they receive is not then remitted to the revenue authority, they are committing a crime: this is Missing Trader Fraud. Should the goods be repeatedly exported and re-imported then this criminal practice can be repeated, giving the activity its more common name, Carousel Fraud.
This is not a fraud against the institutions of the European Union, nor does it occur because of any mismanagement by them. Instead it is the fiscal authorities of the Member States that are being defrauded, due to the rules that they have chosen to implement for the taxation of intra-Community trade. The report examines whether Missing Trader Fraud can ever be prevented under the current system and considers some alternative mechanisms for the taxation of intra-Community trade.
Attempts to undertake this fraud have risen considerably in the past decade, largely due to the proliferation of high value & low weight goods, such as mobile phones, and substantial losses—up to £4.75 billion for 2005/06—are estimated to have occurred in the UK alone. This report examines the measures that have been taken in the UK both to recoup income already obtained fraudulently by those undertaking this activity, and also to prevent the fraud from being able to occur. We look ahead to the limited reverse charge accounting system which is to be introduced to the sectors most commonly used by the criminals exploiting the loophole in the tax system.
In addition to considering the effectiveness of measures taken to date, we have also examined whether the Government's policies to date have imposed an unreasonable burden upon legitimate businesses within the affected sectors.
We conclude that existing measures to tackle Missing Trader Fraud do not prevent its occurrence and are unsustainable. Furthermore, the Government needs to take real and substantive steps to ensure that their actions do not damage innocent traders. We accept that the reverse charge will eradicate Missing Trader Fraud from the sectors currently affected but we expect that the fraud will mutate to other sectors. We call on the Government to work with other Member States to implement a system for taxation of intra-Community transactions which will be more enduring and less vulnerable to major fraud.
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