Memorandum by Hassan Khan & Co Solicitors
Thank you for the extension of time within which
to lodge this submission. As part of its preparation it has been
necessary to liaise with a significant number of traders directly
affected by HMRC's approach to tackling MTIC VAT fraud. Whilst
for reasons of confidentiality, the names of those clients are
not provided in this submission, their views are reflected.
SUMMARY
Hassan Khan & Co Solicitors ("HKS")
and its clients fully support Her Majesty's Revenue & Customs
("HMRÇ) in its aim to eliminate MTIC fraud. As a law
firm which currently represents several dozens of traders in the
mobile telephone and CPU trading sectors, HKS has been able to
closely observe, on a daily basis for several years, the ways
in which HMRC has worked to eliminate MTIC fraud and the implications
when Court action becomes necessary. This has had varying effects
and success. Although a number of measures have been employed,
some of which are addressed below, the current lynchpin of HMRC's
strategy is the process of "extended verification" by
which HMRC examines in detail the underlying transactions which
have given rise to a claim for repayment of input tax credits.
The input tax credits are not repaid while extended verification
continues. In many cases, this has meant that claimed input tax
credits have not been repaid for 12 months or more. The use of
this approach by HMRC has also been very widespread, if not wholesale,
within the sectors HMRC has identified. This both destroys legitimate
businesses and is in breach of Community Law.
From a legal point of view. HKS considers that
two main difficulties arise with the HMRC approach:
1. HMRC is mis-applying Community law.
In HKS's observation. the current measures being
employed by HMRC, in particular the process of wholesale extended
verification, go beyond what has been confirmed as legally permissible
by the European Court of Justice, in the Bond House, Axel Kittel,
Federation of Technological Industries ("FTI") cases
and in the recent decision of the Advocate-General in the Teleos
matter, released on 11 January 2007.
2. HMRC is potentially using (and overburdening)
the UK Courts for an improper purpose.
As a consequence of the measures employed by
HMRC, individual traders are being forced to go to the High Court
(with its attendant high costs) seeking permission for Judicial
Review of HMRC's failure to make a decision and are being deprived
of a judicial remedy in the VAT Tribunal (where the legal and
evidential basis of HMRC's approach can be tested) by HMRC's continuing
failure to make a decision for an unreasonable period of time.
The large number of traders forced to seek Judicial Review in
the Administrative Court has clogged the Court list, particularly
as HMRC often makes a decision in respect of the claimed input
tax credits on the "doorstep" of the hearing. Arguably,
this could constitute an abuse of the High Court's process.
These and other matters are expanded upon below.
DETAILED SUBMISSION
1. HKS
1.1 HKS is grateful to the Committee for
the opportunity to make submissions on this issue as part of the
evidence gathering leading towards the Committee's Report.
1.2 HKS is a London based law firm which
specialises in dealing with indirect tax, customs and excise issues
experienced by its clients. It is recognised by Independent Guides
such as Chambers & Partners 2006 and 2007 as a leading firm
in the UK in the areas of contentious tax and Revenue and Customs.
The principal of the firm conducted the Bond House Systems Limited
test case ("the Bond House case") in the VAT and Duties
Tribunal, High Court and European Court of Justice. This challenged
the legality of the HMRC approach of disallowing VAT credits based
using the principle of "non-economic activity" in the
VAT and Duties Tribunal, High Court and the Court of Justice of
the European Communities ("ECJ"). The case is considered
to be the landmark VAT tax case of 2006.
1.3 HKS acts for a number of mobile telephone
and computer chip traders and currently has conduct of approximately
100 varied tax appeals and Judicial Review cases in the VAT and
Duties Tribunal and the High Court.
1.4 HKS and its clients fully support HMRC's
desire to eliminate fraud, however, it is not accepted that the
current strategies implemented are actually achieving this objective.
Further, the current strategies are disproportionate given that
they impact equally severely on established, legitimate and innocent
traders, as they do on fraudulent traders. Whilst it is fully
appreciated that a loss (or potential loss) to the Revenue of
the magnitude estimated in the Pre-Budget Report puts very significant
pressure on HMRC (with the assistance of other agencies as required)
to act swiftly in curbing this problem. HMRC's actions to date
arguably go well beyond what is permitted by Community law and
show a lack of clear targeting and insufficient regard for basic
Community law principles of VAT and proportionality, in particular.
2. Questions
2.1 As HKS acts for a significant number
of traders and has extensive experience in dealing with HMRC,
it is able to make an informed contribution to some of the questions
raised by the European Union Committee. It has also conducted
many cases before the Courts, several of which are lead reported
cases in the areas associated with denying VAT repayments and
the tax consequences on legitimate traders'of efforts to tackle
MTIC fraud.
2.2 HKS considers that it is most appropriate
for it to address the first two key questions raised in the Call
for Evidence; however, it considers that those questions are best
considered in reverse. We will also briefly consider question
3, specifically, the principle of mutual assistance by Member
States; therefore, this submission will address the questions
as follows:
What are the measures currently applied in the
UK and other Member States to combat this fraud and what are their
weaknesses?
What impact does this fraud have on the internal
market?
The Commission has suggested measures including
increased cross-border liaison tax and law enforcement authorities
and Governments, improved risk management, and mutual assistance
by Member States wishing to recover unpaid taxes. Are these mechanisms
adequate?
3. What are the measures currently applied
in the UK and other Member States to combat this fraud and what
are their weaknesses?
3.1 The material published with the Chancellor's
Pre-Budget Report to the House of Commons in December 2006, indicated
the Government's strengthening of strategy to combat MTIC fraud
as being directed on four different levels, namely:
3.1.1 Identifying and prosecuting the criminals
behind the fraud;
3.1.2 Working internationally to combat cross-border
fraud;
3.1.3 Identifying and tracking those goods
most susceptible to MTIC fraud; and
3.1.4 More in depth checking of suspect repayment
claims.
3.2 HKS and its clients fully support the
first three of these four central strategies. Although it is considered
(in respect of item 3.1.3) that the practical implications of
HMRC's decision to introduce the legal basis in the Finance Act
2006 to require traders to keep IMEI (International Mobile Equipment
Identifier numbers) of mobile telephones was very significantly
understated in its Regulatory Impact Assessment. Traders do experience
significant difficulties with the cost, accuracy and effectiveness
of attempting to retain IMEI numbers. In this submission focus
is on the way in which it appears that HMRC is putting the fourth
limb of the strategy into place and the consequences of these
measures. since this has the most disproportionate effect on legitimate
traders.
3.3 A more detailed analysis of how this
strategy has been put into practice illustrates that HMRC has
implemented the following:
4. Extended verification
4.1 HMRC's current policy of widespread
"extended verification" appears to have been instigated
following the release of the Bond House decision by the
European Court of Justice in January 2006.
4.2 The Bond House case involved an aggressive
line taken by HMRC in its fight against "carousel" or
MTIC fraud in which HMRC decided that they would disallow the
input tax claimed by legitimate traders involved in a transaction
chain where one or more of the other traders were said to be fraudulent,
such that if an innocent business was unknowingly involved in
a trading chain, one part of which was alleged to be undertaken
for VAT fraud purposes, that entire transaction chain was considered
by HMRC to be a "non-economic activity" and they could
not reclaim input VAT. In practice, the trader of exporting the
goods was deprived of their input tax reclaim whilst HMRC paid
back VAT elsewhere in the chain. The VAT and Duties Tribunal supported
this view and the decision was appealed to the High Court, which
referred the case to the ECJ.
4.3 HMRC's policy predominantly affected
businesses in the mobile phone and computer hardware industries,
but had worrying implication for other business sectors. These
two business sectors had been very badly hit forcing many to suspend
trading and some to enter into liquidation, as was the case with
one of the appellants in the Bond House case.
4.4 In January 2006, the ECJ delivered its
decision in the Bond House case, agreeing with the Advocate
General's earlier position and unequivocally disagreeing with
the analysis of HMRC and the VAT and Duties Tribunal. The ECJ
held that a taxable person's right to deduct input tax must be
assessed individually and cannot be affected by the fact that
in the chain of supply of which those transactions form part,
another prior or subsequent transaction is vitiated by VAT fraud
without that taxable person knowing or having means of knowing
of that fraud.
4.5 This approach was confirmed by the ECJ
case of Axel Kittel in July 2006, where the ECJ made a
number of observations, being, primarily:
4.5.1 Preventing tax evasion, avoidance and
abuse is an objective recognised and encouraged by the Sixth (VAT)
Directive.
4.5.2 Where the tax authorities find that
the right to deduct has been exercised fraudulently they are permitted
to reclaim repayment of the deducted sums retroactively. It is
a matter for the national Court to refuse to allow the right to
deduct where it is established, on the basis of objective evidence,
that that right is being relied on for fraudulent ends.
4.5.3 Traders who take every precaution which
could reasonably be required of them to ensure that their transactions
are not connected with fraud, be it the fraudulent evasion of
VAT or other fraud, must be able to rely on the legality of those
transactions without the risk of losing their right to deduct
the input tax.
4.6 In light of the Bond House decision.
HMRC has concentrated its efforts in establishing that individual
traders had the "means of knowing" that VAT would go
unpaid somewhere in their supply chains. This has resulted in
the widescale "extended verification" of VAT Returns.
Extended verification has been one of the most significant policies
implemented by HMRC by which they block VAT refuses to pay input
tax refunds until they have completed their enquiries in relation
to the underlying transactions. The process of extended verification
generally involves numerous site visits and multiple demands for
(frequently the same) documents from traders and a full examination
of all traders in each supply chain. Many traders have become
so disconcerted by HMRC's actions and approach that they instruct
their legal or accountancy representatives to be present at such
visits. This increases legal costs, particularly where HMRC could
have made a single request for information at the outset.
4.7 HKS does not dispute HMRC have a reasonable
opportunity to make reasonable enquiries within a reasonable timeframe,
however, HMRC's extended verification strategy goes well beyond
those parameters. The December 2006 Pre-Budget Report stated that
"the vast majority of suspect repayment claims are now subject
to in-depth checking and will not be paid unless and until found
to be properly payable". This is an incorrect starting point.
Such a "guilty until proven innocent" approach is contrary
to Community law (in particular, Article 17 of the Sixth VAT Directive)
which recognises that there is an immediate right to deduct input
VAT. This right is then only liable to be interfered with if,
in relation to each individual transaction, it is in pursuance
of the purpose of preventing tax avoidance, evasion or abuse.
HMRC are not adopting a refined, balanced approach in this respect.
It is clear that since March 2006 (VAT Accounting Period 03/06)
HMRC have blocked input tax reclaims to almost every trader in
the sectors targeted.
4.8 Nor are HMRC permitting any scope to
argue special circumstances. No distinction is being made between
established traders who practice extensive due diligence, have
no tax losses and comply with all guidance notes, and those that
do not (whether they are actually engaged in fraud or not). The
HMRC position on interim payments is confused and results, in
every instance, in a decision to deny interim payments regardless
of the strength of the request or supporting independent expert
accounting evidence.
4.9 Until HMRC make a decision either to
repay or disallow the input tax claimed, traders have no other
avenue of redress, except to seek permission from the High Court
for a Judicial Review of the reasonableness and procedural propriety
of HMRC's actions in withholding repayments on the grounds of
extended verification. This is a long and expensive process in
itself and forces traders to divert yet more resources away from
their businesses, further threatening their ability to continue
to trade. This prolonged failure to make a decision is depriving
traders of an effective legal remedy. In several cases HMRC have
made a final decision the day before a hearing for Judicial Review
has been listed for hearing. This raises serious questions about
HMRC's approach to the proper administration of VAT.
4.10 The "extended verification"
strategy has also extended to the failure of the Commissioners
to pay the VAT reclaimed on overheads. Many traders have received
no payment at all. HMRC has no clear or consistent policy on how
to approach this (or at least that) his the practical consequences
of applying any policy that does currently exist) and the only
reason which has been provided for the delay in repayment has
been the verification of "supply chains that may be tainted
by fraud". It is difficult to see any sustainable connection
between verification of "supply chains that may be tainted
by fraud" and the recovery of input tax on overheads which
have been incurred by traders. It is unclear as to what additional
verification the Commissioners might be carrying out in relation
to overheads and indeed how such enquiries would constitute "reasonable
enquiries" within the meaning of section 79 of the VAT Act.
5. Changing traders VAT Accounting Period
Returns from monthly to quarterly
5.1 It is understood that the aim of this
strategy is to reduce losses arising from MTIC fraud by reducing
the frequency of VAT repayments.
5.2 This strategy has been applied by HMRC
inconsistently. In addition, in 2006 HMRC formulated a new policy
in relation to the strategy without that policy being communicated
to traders. There are concerns both with the legality of the policy
and that a new policy is being implemented without it being brought
to the attention of affected parties, so that they are aware of
the regulatory landscape within which they are expected to operate.
6. Deregistration
6.1 HMRC have taken the step of deregistering
traders for VAT purposes who may have temporarily stopped making
supplies or trading. This is an aggressive and often misplaced
strategy.
6.2 In most circumstances, traders have
temporarily ceased trading solely as a consequence of cash-flow
issues resulting directly from HMRC's own withholding of input
tax credits. Many traders in the mobile telephone industry have
been forced into this position due to the withholding of VAT reclaims.
However, once weakened in this disproportionate way, HMRC have
then threatened them with deregistration. Such a threat is arguably
an abuse of the deregistration powers contained in Schedule 1
of the VAT Act 1994 as the reason that trade may have temporarily
stopped is a direct result of HMRC's actions. HMRC are obviously
aware of this. These cases are then the subject of appeals to
the VAT and Duties Tribunal causing further expense for trader,
HMRC themselves and the taxpayer through unnecessary burdening
of the VAT Tribunal and increased costs.
6.3 In addition, some HMRC officers have,
it appears, used deregistration as a de facto penalty measure.
For example, in one case where, upon an HMRC officer attending
a trader's premises for a site visit and finding the premises
unattended (that morning), the HMRC officer deregistered the trader
immediately. This is an example of deregistration being used for
a purpose other than that which was legislatively intended.
7. Set off of unpaid direct tax liabilities
7.1 HMRC is also now seeking to pursue traders
for unpaid direct tax liabilities including Corporation tax, PAYE
and NIC. Given that HMRC are withholding funds that, in many cases,
are sufficient to extinguish by several multiples the direct tax
liabilities and represent substantially all working capital, traders
are obviously seeking to set-off the direct tax liabilities against
the withheld VAT.
7.2 HMRC appear to be adopting an unstructured
approach, which has led to inconsistencies with some traders being
threatened with debt recovery proceedings while others are not.
7.3 This is yet a further "policy"
which has emerged with an inconsistent approach and little or
no publication of the policy itself. Its effects are wide-ranging,
damaging and in many cases entirely disproportionate. No legitimate
business disputes its need to pay direct tax liabilities but great
exception is taken to debt recovery procedures being used for
tax liabilities held by the same Department withholding much larger
VAT reclaims, including those incurred on overheads.
8. Litigation
8.1 HMRC are increasingly willing to engage
in litigation to implement their policies.
8.2 While civil litigation may well serve
to increase the financial risk for fraudsters and thereby act
as an indirect deterrent, it also increases the risk for legitimate
traders, given that no differentiation is made in withholding
repayment between those with knowledge or means of knowledge of
fraud and those lacking any such knowledge or means of knowledge.
8.3 Many traders are being forced to pursue
Judicial Review proceedings in the High Court, simply to get a
decision which, if unfavourable, may then be appealed in the VAT
and Duties Tribunal. It is becoming increasingly apparent that
HMRC are holding off making a decision until the eve of the Judicial
Review hearing, thereby depriving traders of a decision for as
long as possible. In addition to constituting an arguable abuse
of the Court's process, this is actually incurring additional
cost to HMRC in terms of the legal costs involved in defending
the judicial review until the eve of the hearing. This cost and
the use of the Courts resources is being borne by the taxpayer.
8.4 HKS has many clients who have waited
many months (many since March 2006) for HMRC to make a decision
following the "extended verification" process. Given
the successive requests by HMRC (often for documents that have
already been provided) many traders have determined that they
have had no option but to issue High Court proceedings applying
for Permission to apply for Judicial Review of HMRC's failure
to make a decision and unreasonable delay. This is the only recourse
available to traders in this position. In many cases an application
for urgency has either accompanied the permission application,
or has followed it, once it has become clear that the trader in
question may be forced to wait many more months before the permission
application is even considered on the papers by the Courts. In
most cases that HKS has been involved in, the time taken from
a trader first being advised that it is subject to "extended
verification" and the hearing of the permission application
(even with an urgency application) has exceeded six months.
8.5 Frustratingly, in a number of cases.
HMRC have determined to reach a decision (to date always to disallow
repayment of VAT) a matter of days prior to the hearing. Only
then can the trader appeal the decision in the VAT and Duties
Tribunal, necessitating greater expense and further delays. Although,
in theory, it is open to the trader to continue the proceedings
in the High Court in an attempt to obtain a ruling on the reasonableness
of HMRC's delay, in reaching a decision (despite a decision having
been made) and to scrutinise HMRC's actions. However, some Judges
have taken the approach that the purpose of bringing judicial
review proceedings is to purely to push HMRC to make a decision
and have determined that:
8.5.1 It is inappropriate for the Administrative
Court to make a decision regarding the merits of the decision
to deny the input tax claim as it is outside the Court's jurisdiction.
8.5.2 It is not a proper use of the Court's
time to carry out what would be a lengthy investigation on whether
or not HMRC should have made a decision earlier and whether HMRC's
legal position is incorrect.
8.5.3 Proceeding to judicial review also
exposes a trader to a costs order against no matter how late HMRC's
decision before the hearing.
8.6 This places traders in an extremely
difficult position, as they are unable to obtain any legal certainty
in this area. Many traders have more than one monthly VAT input
tax refund owed and are, therefore, on occasion required to issue
multiple judicial review proceedings, before then proceeding with
multiple appeals (each in relation to a separate VAT return, and
in relation to different portions of those returns where, for
example, a decision to disallow has been made in relation to particular
transactions and not others) in the VAT and Duties Tribunal.
8.7 Clearly, forcing legitimate traders
to go to such lengths in an attempt to have their VAT input tax
repaid, is disproportionate in the extreme. Indeed, in one case
HMRC, through Counsel, stated in the High Court that their view
of the right to deduct input tax contained in the 6th EC VAT Directive
was that it was not applicable until the end of an HMRC investigation
and ultimate outcome of consequent proceedings. To suggest that
traders have no right to deduct input tax for what is in this
type of instance, two year, is plainly without merit, absurd and
a clear breach of the legal requirements of the 6th Directive.
9. Reverse Charge
9.1 HMRC asserts that the reverse charge
derogation will remove the mechanism for VAT fraud on most affected
goods. However, since all 27 Member States must agree to the derogation
from the Sixth VAT Directive before the new tax regime can be
implemented, there is considerable doubt about whether all Member
States will agree to the measure as currently proposed, given
that one effect of the proposed derogation may be to displace
VAT fraud to other Member States which do not have, and have not
requested, a derogation.
9.2 Fraudulent traders are likely to have
moved on to trade in a different industry where reverse charge
is not proposed to be applied, but if not, are likely to do so
prior to the implementation of the measure. Regulations will need
to continually be made to stop MTIC fraud from successfully mutating
to other goods.
10. Joint and several liability for unpaid
VAT
10.1 HMRC obtained the power in 2003 to
impose joint and several liability for unpaid VAT on traders dealing
in goods in which the chain of transactions includes a trader
who has not paid VAT.
10.2 On 11 May 2006, the ECJ delivered a
decision on joint and several liability in the FTI case.
The ECJ was asked to provide a preliminary ruling on the compatibility
with EC Law of sections 17 and 18 of the Finance Act 2003 which
implemented s77A of the VAT Act 1994. Those sections were enacted
to deal with the fraudulent abuse of the VAT system by providing
for the joint and several liability of taxable persons for VAT
in certain circumstances.
10.3 The ECJ accepted the arguments made
by HMRC and ruled that the Member States are permitted to enact
legislation which provides that a taxable person may be made jointly
and severally liable for the payment of VAT in circumstances where
that person knew, or had reasonable grounds to suspect, that some
of all of the VAT payable in respect of a supply of goods or services
would go unpaid.
10.4 The ECJ recognised that legitimate
traders are entitled to protection from the joint and several
liability provisions to the extent that traders "take every
precaution which could reasonably be required of them to ensure
their transactions do not form part of a transaction vitiated
by VAT fraud."
10.5 The ECJ also provided guidance on the
rebuttable presumptions directed at establishing that a taxable
person knew or had reasonable grounds to suspect VAT would go
unpaid. In particular, the ECJ noted that the presumptions "may
not be formulated in such a way as to make it practically impossible
or excessively difficult for the taxable person to rebut them
with evidence to the contrary".
10.6 Although the FTI case seemed to provide
clear guidelines, these have not always been implemented by HMRC.
Given that HMRC's policies are often not communicated to traders
and/or that this is done inconsistently, it makes it particularly
difficult for traders to "take all precautions" in ensuring
that their transactions do not form part of a chain involving
fraudulent trades. Even where traders practice extremely rigorous
due diligence and take reasonable precautions, their VAT reclaims
are still being made the subject of the extended verification
process. It is understood HMRC are experiencing difficulty with
the practical implications of applying the Joint and Several liability
provisions.
11. What impact does this fraud have on the
internal market?
11.1 As far as we are aware at present,
it appears that no mobile phone trader has been paid its full
VAT input tax refund since about April 2006, although there have
been some instances in which interim repayment for the VAT incurred
on overheads has been made. Traders' compliance with the guidance
notes or legal regime has not provided any measure of protection
to exporters. The weaknesses of the current measures are that
they are not directed at fraudulent traders, or the fraud itself,
but at all traders in the mobile phone and computer chip industries
in general. The current strategy is preventing legitimate traders
from trading and driving legitimate traders out of business. This
also acts to restrict exports, which has an effect on the UK's
trade position generally. In so far as this affects intra-Community
trade in such goods, it is well established that national measures
may only interfere in so far as strictly necessary with the free
movement of goods within the EU. The question arises very significantly
from HMRC's measures, as applied by them. whether in many cases
the action being taken by them is disproportionate and goes beyond
what is necessary to achieve the legitimate aim of preventing
tax evasion. avoidance or abuse. This has not yet been fully tested
due to the great difficulty of obtaining a decision from HMRC
by virtue of their policy of extended verification. It is another
example of the effect of traders being deprived of a legal remedy
for an unreasonable period of time.
11.2 The existing measures have not brought
MTIC fraud to an end, in part because MTIC fraud may be diversifying
both in terms of the types of products being traded and the way
the fraud itself is structured. At the same time a significant
number of traders have ceased trading due to the financial pressure
of having significant sums (often many millions of pounds) of
VAT input tax refunds withheld. Traders in these industries are
often reliant on prompt repayment of these sums as their working
capital. Even where traders may have the finances to continue
trading, they may have ceased in the knowledge that their VAT
input tax refund will be withheld. This quite clearly applies
to innocent traders also, given that HMRC is failing to make any
discernible distinction between traders and has determined to
implement the current strategy of withholding all VAT input tax
refunds for traders operating in the mobile phone and computer
chip industries. Further, this strategy fails to take into account
a trader's individual. circumstances and adherence to all practice
guidelines given by HMRC, with respect to due diligence and all
other information requested and provided by traders to HMRC.
11.3 As specifically stated by the ECJ in
the FTI case, traders who take every precaution which could
reasonably be required of them to ensure their transactions do
not form part of a chain which includes a transaction vitiated
by VAT fraud must be able to rely on the legality of those transactions
without the risk of being made jointly and severally liable to
pay the VAT due from another. This principle is likely to be of
general application to any situation in which HMRC try to hold
one trader liable for the actions of a fraudster. Indeed the ECJ
also held in the Axel Kittel case that the question of
whether the fiscal authorities have actually collected tax (in
a prior supply) is not relevant to the right of a taxable person
to deduct input tax.
11.4 In the recent ECJ case of Teleos,
the Advocate General's Opinion (published on 11 January 2007)
expressly warned against the disproportionate burden being placed
on the suppliers of goods that may create an obstacle to the movement
of free goods. It was stated that the risk that the supplier might
be liable for VAT in the event of its purchaser not actually exporting
the goods, but feigning transport by means of fraudulent transport
documents, could deter the supplier from trans-frontier transactions.
11.5 While the Advocate-General recognised
that the Sixth VAT Directive recognised that the fighting of tax
evasion may justify some restrictions on the free movement of
goods, he considered that the approach advocated by the Member
States in Teleos would lead to an unreasonable allocation
of risk between the supplier and the revenue authority in relation
to the criminal conduct of a third party and considered that this
would offend the principle of proportionality. This is a further
area where the measures being employed are distorting the internal
market.
12. The Commission has suggested measures
including increased cross-border liaison between tax and law enforcement
authorities and Governments, improved risk management, and mutual
assistance by Member States wishing to recover unpaid taxes. Are
these mechanisms adequate?
12.1 Presently, HMRC often claim that the
delays in the extended verification process are as a result of
the delays involved in HMRC's enquiries with Member States and
the slow response. The possibility of a quicker and more detailed
exchange of information between Member States would be beneficial
to legitimate traders who have in the past regularly been advised
that the process of extended verification cannot be completed
due to outstanding enquiries with other Member States.
12.2 While the principle of mutual assistance
seems beneficial, in practice the current regime only requires
Member States to respond to enquiries in six months. HMRC then
has an additional two months in which to request the authority
to continue its investigations. In theory, this provides an opportunity
for up to eight months delay in the verification of returns (and
possibly longer if additional investigations are requested). This
process would be much improved by a more efficient and transparent
cross-border liaison between tax and law enforcements authorities
and governments.
13. Conclusion
Whilst all legitimate traders favour the reduction
of tax fraud in their marketplace, the current measures by HMRC
are disproportionate, often indiscriminately targeted and seem
aimed at the elimination of the marketplace itself rather than
the fraud occurring within it. Over time this will further damage
the UK's intra-Community trade position, reduce indirect tax receipts
from value added components in the UK supply chain, and reduce
direct tax receipts through reduced trading, loss of employment,
business closure, and relocation to outside the UK. It will also
almost certainly in due course result in very significant damages
claims against the UK for failure to adhere to basic accepted
principles of Community law.
31 January 2007
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