Memorandum by the Institute of Chartered
Accountants of Scotland
Many thanks for your letter of 8 December 2006
and the invitation to present evidence to the European Union Committee
on Missing Trader Intra Community Fraud (MTIC).
MTIC fraud occurs because imported goods across
EU borders takes place without VAT being imposed in the country
of origin. Such an arrangement was supposed to be a temporary
arrangement while members harmonised their VAT systems and rates.
It is abhorrent that criminals have been able
to abuse the system in such a way that they fraudulently obtain
money and place at risk the integrity of the system, undermining
the confidence which ordinary taxpayers have in the system. In
principle such activity is intolerable and we at the Institute
of Chartered Accountants of Scotland are anxious to do all that
we can to eliminate the fraud.
During 2006, we issued a copy of the letter
attached at Appendix 1 to all our members. This was intended to
raise awareness of the fraud helping those who might otherwise
become embroiled to identify the risks. We also published in our
CA Magazine an article (Appendix 2) highlighting the risks
and identifying the warning features.
Newspaper coverage throughout 2006 has been
a cause of concern. By the summer of 2006, according to the Guardian,
the Office of National Statistics estimated that £10
million was being lost to criminal activity in one quarter of
the year. A fraud at such a level would be of a concern to every
citizen because it would force the Government to raise tax. It
is in the public interest that such fraud must be stopped. The
existence of such levels of fraud within the UK alone must have
a detrimental impact on the internal market. It indicates that
the current structure of the internal market is seriously flawed.
There is concern that the major economies of Britain, Germany,
France and Italy are most at risk and anecdotal evidence suggests
that the UK fiscal authorities have been relatively successful
in challenging the fraud. The policy of more careful examination
of repayment claims has identified fraudulent activity which has
then seen the successful rejection of the repayments. The anecdotal
evidence suggests that the fraudsters have transferred their activity
to other fiscal jurisdictions as well as diversifying their activity
into other goods.
More generally, fraud at such a level on any
fiscal system undermines the acceptability and integrity of the
fiscal system. Honest taxpayers will be concerned if they think
that fraudsters are abusing the system and fraudulently extracting
money.
Evidence of greater cross border co-operation
to challenge MTIC fraud is to be welcomed. In August, the successful
operation mounted by HMRC and its European counterparts, officials
from Zollkriminalant, Germany's Customs department, were deployed
in the Swiss/German border and at Frankfurt Airport to monitor
the movements of goods into the European Union. The serial numbers
of over 30,000 mobile phones were scanned and compared with others
in HMRC's nemesis database and uncovered evidence of MTIC fraud.
The extension of legislation empowering HMRC to mark goods identified
as being at risk enables the fiscal authorities to track those
commodities that have in the past been used to make fraudulent
claims across EU borders. This can only be one element of the
anti MTIC strategy but it is a good example of the kind of international
co-operation which will tackle MTIC fraud quickly and effectively
for specific goods. The risk is that the fraudsters will then
use a different type of commodity rather than, as in this case,
mobile phones.
Improved intelligence should help to identify
data which suggests that international trade may be a risk factor
being abused by potential fraudsters. If, for example, there is
no substantial manufacturing activity of specific high value goods
and yet goods are being exported, there must be a risk that in
the absence of an obvious commercial reason for such an export
trade, the economic motivator is the fraud involving VAT. As a
general principle, the Commission's suggestion to increase cross
border liaison by tax and law enforcement authorities and governments
should lead to improved risk management and a better challenge.
Only time will tell whether these mechanisms are adequate but
they would, in the short term, appear to be effective in helping
the UK combat MTIC fraud.
In MTIC fraud, the goods are merely a means
to give structure to the transaction. Effectively, it is the VAT
or purported VAT that is the economic driver and that is what
is being traded. As there is no true economic purpose to the transactions,
they are arguably outside the scope of VAT and it is arguable
that input tax is not recoverable. This was the underlying principle
to the 2003 legislation denying the recovery of input tax to traders
involved in the chain. Arguably, they should be held as joint
and severally liable if they negligently became involved in a
carousel chain with the purchaser appearing to be the buffer.
One way which HMRC attempts to stop the carousel
fraud is at the stage of considering an application to register
for VAT. This acts as a deterrent to the potential fraudsters
but it can cause considerable additional cost and inconvenience
to honest traders wishing to register. The significant delays
in processing registration applicants are generally unwelcome
and the UK compares poorly with other jurisdictions in this regard.
Customs are able to exercise a further level of control by requiring
some traders to obtain Customs approval on a daily basis before
finalising a transaction. Such traders must send to HMRC details
of sales, purchases, customers and suppliers so that HMRC can
monitor transactions and using risk assessment try to stop VAT
fraud.
The 2003 legislation attempted to make persons
in a supply chain jointly and severally liable for VAT that has
not been paid by a missing trader where they knew, or had reasonable
grounds to suspect, that VAT would go unpaid. The measure applies
to goods of a specified description and the risk is that fraudsters
will merely use goods that are outside the specified descriptions
which currently includes telephones, computers and certain high
value related components.
In contacting ICAS members and publishing articles
on how to identify and combat fraud, ICAS has been trying to prevent
the fraud occurring. It is in everyone's interests that commercial
organisations should take reasonable steps to enquire into the
legitimacy of customers, the economic viability of transactions
and the preservation of redress if the vendor is not able to transfer
proper legal title.
At the time of writing, the UK Government and
HMRC has been frustrated in seeking to impose a reverse charge
mechanism on certain goods. There is a concern that such an approach
would not be effective as it might transfer the problem to another
EU country or alternatively it might change the nature of the
goods used to give the transactions some structure. In inviting
evidence, the Committee asked whether these mechanisms are adequate.
It is difficult to answer that question because of the lack of
empirical evidence but we are confident that the visible prosecution
of fraudsters and the improvement in identifying goods being transferred
and risk assessment all act as significant deterrents to the fraudsters.
The fraudsters are however manipulating the temporary VAT regime
which is being shown to be defective. The solution must be that
member states have a responsibility to fight individually against
this fraud and to do all that they can to prevent it. It is also
right that the Commission should bring forward proposals and a
potential solution would be to reconsider the VAT scheme and move
from the temporary arrangements towards an origin scheme as was
the original intention.
The final question posed by the Committee is
to attempt to quantify the benefits and costs of moving from the
current destination system to an origin system. We are unable
to comment on this. A significant variable in attempting to answer
this question must be the lack of harmony in the VAT tax rates
between different member states. This raises issues of sovereignty.
We believe that simplification and restructuring of the VAT system
has much to commend it but we refrain from commenting on VAT tax
rates as this would appear to be a political decision.
12 January 2007
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