Memorandum by Robert W Maas, The Institute
of Indirect Taxation
I am writing on behalf of The Institute of Indirect
Taxation in response to your recent call for evidence to assist
your Committee's Inquiry into MTIC fraud.
The Institute of Indirect Taxation is a professional
body representing indirect tax practitioners. It was formed in
1991 and has approximately 500 members and 150 students for its
examinations. The membership comprises solicitors, accountants,
barristers and other practitioners in indirect tax. Many of its
members are ex-HMRC staff, and serving officers of HMRC are both
members and students of the Institute.
What impact does MTIC fraud have on the internal
market?
The European Commission has estimated that tax
fraud, a major part of which is MTIC fraud, accounts for between
€200 and €250 billion throughout the EU as a whole (EU
Tax Policy Strategy 5 September 2006). MTIC fraud is not peculiar
to the UK. It is also a problem in other EC countries. Last year
not only the UK but also Germany and Austria applied for derogations
to introduce a reverse charge to combat this fraud.
MTIC fraud exploits a design fault in the structure
of VAT. VAT is normally imposed on the value added by a trader.
A trader who buys goods pays his vendor the VAT on his purchase
price, so if he disappears without accounting for VAT on his sales,
the tax lost is only that on his profit margin. If he imports
the goods from outside the EU he similarly pays input VAT on his
purchase price at the time of import. However goods acquired from
another EU country enter the UK without a VAT charge being imposed
either by the UK or the country from which the goods are imported.
Instead it is up to the trader to account for VAT on the acquisition
of the goods on his VAT return. At the same time he can normally
claim that VAT as input tax so nothing is due to HMRC in respect
of the goods until they are sold, when VAT becomes payable on
the sale proceeds. Accordingly if the UK trader disappears without
accounting for VAT it is the entire amount of VAT that he charges
on his sale that is unaccounted for.
The UK's derogation is limited to VAT on four
specific types of goods. It has been granted for a limited period
to 31 December 2009 only, in order to allow for an evaluation
of its effectiveness (both as regards MTIC fraud and in preventing
final consumption without VAT payment) and its impact on the functioning
of the Internal Market. The Commission's proposal to the Council
to approve the UK derogation (COM/2006/555) indicates that it
was accepted with reluctance and only on the basis that it applies
only to a limited range of goods and because the UK told the Commission
that it will affect only some 22,500 taxable persons out of a
total of 1.9 million VAT registered businesses. The wider derogations
sought by Germany and Austria were refused by the Commission.
The UK derogation will cease to be effective if fraudsters move
their attention to goods other than those in the four categories
approved by the Commission. A broadening of the derogation to
other categories seems unlikely to meet with the Commission's
approval.
MTIC fraud calls into question the efficacy
of the system of allowing movements of goods free of VAT across
borders between EU countries.
What measures are currently applied in the UK?
The UK has introduced a number of measures aimed
to counter MTIC fraud.
1. Requirement of evidence or security (VATA
1994, Sch 11, para 4(2), inserted by FA 2003, s 17)
2. Joint and several liability (VATA 1994,
s 77A inserted by FA 2003, s 18)
3. The reverse charge (VATA 1994, s 55A inserted
by FA 2006, s 19)
4. Power to inspect goods (VATA 1994, Sch
11, para 10(2A) inserted by FA 2006, s 20)
5. Directions to keep records (VATA 1994,
Sch 69B inserted by FA 2006, s 21)
6. The imposition of checks on the issue
of VAT registration numbers.
7. HMRC have issued a leaflet, "How
to spot VAT missing trader fraud", which we believe was sent
to all VAT registered traders.
The first two of these seek to impose liability
for the missing trader's tax on other traders in the supply chain.
The weakness of this is that it is inherently unfair to impose
on an innocent trader who becomes accidentally involved in an
MTIC supply chain either an obligation to provide security for
the tax of an unrelated third party as a condition of doing business,
or a requirement to pay a tax liability of a third party with
whom the trader may have had no dealings whatsoever.
HMRC have, of course, said that they will only
impose an obligation to provide security on businesses which,
despite warning, continue to deal with businesses that commit
fraud. We have to date no experience of the imposition of such
a requirement. It is hard to envisage how HMRC can effectively
"warn" a business about another without breaching their
duty of confidentiality unless the other's involvement with a
suspected fraud is in the public domain. HMRC have also said that
they will not impose joint and several liability for another's
VAT debt on a trader unless he had reasonable grounds to suspect
fraud. However the tests that HMRC expect a trader to carry out
to escape liability go well beyond those that most traders would
carry out as a matter of course. HMRC appear to believe that it
should be obvious from the nature of the transactions that a person
is becoming involved in an MTIC supply chain, but they may well
underestimate the naivety of some traders.
These two measures effectively leave it to other
traders to police MTIC fraud and to take the financial consequences
of not doing so effectively. HMRC have set up a team who will
check a supplier's or customer's VAT number if requested to do
so by a trader. However they have said, "The team does not
offer a service of approving transactions nor, if they confirm
that the details provided are correct, can this be viewed as authorisation
for the trader to do business with that VAT registration. Any
decision to trade is a commercial decision for the individual
business and Customs cannot tell businesses whether or not to
undertake any specific transaction." (Business Brief 15/03).
This may be a resource issue. However this seems an odd policy
in the context that a major problem with MTIC fraud is that the
missing trader disappears before HMRC have pieced together the
supply chain. Approving individual transactions would allow HMRC
to monitor possible supply chains in real time, which would reduce
that problem.
The reverse charge should prove effective in
eliminating MTIC fraud in the commodities covered by it. However
it seems likely that the fraudsters will in future use different
types of goods not covered by the derogation.
The power to inspect goods and the duty to keep
records ought to help HMRC in investigating a supply chain and
thus facilitate prosecution of the criminals. However as the fraud
will have preceded any such investigation they seem unlikely to
have a deterrent effect. A series of successful prosecutions might
have such an effect but prosecutions launched as a result of these
powers are likely to take several years to come to court.
We do not know how effective pre-registration
checks are. We suspect that HMRC do not know either. The fact
that a person does not appeal against a refusal of a registration
does not mean that he is a fraudster. We do know that the checks
have brought about serious delays in the registration of new businesses,
although we acknowledge that HMRC are taking steps to reduce such
delays. Nevertheless there may be a balance to be sought between
preventing fraud by a tiny number of people and deterring the
establishment of new businesses in general by imposing a delay
in registration—which to small businesses in particular
often means a delay in being able to commence generating income.
Such a delay can adversely affect the viability of the business.
Exhorting traders to apply checks on their suppliers
and customers is unlikely to have much long-term effect.
The Commission Proposals on Co-operation
Better cross border liaison by tax and law enforcement
authorities could well increase the likelihood of successful prosecutions.
It seems unlikely to have much effect on preventing fraud occurring.
It should also be noted that the Commission paper (COM/2006/254)
itself notes at para 2.1; "Although the common legal framework
for administrative co-operation was reinforced some years ago,
the Member States do not make sufficient use of the new possibilities
offered and the level of administrative co-operation is not commensurate
with the size of intra-community trade." The adequacy or
otherwise of the mechanisms available become irrelevant if there
is a reluctance to use them.
Are Member States capable of fighting MTIC individually?
We have no view.
Is it necessary to simplify or restructure the
VAT system?
We believe that the only effective ways to counter
the fraud are either to collect VAT when goods enter the UK from
another EU country or to impose a reverse charge generally. Both
of these would be fundamental changes to the VAT system.
Does the adoption of Community measures undermine
Member States?
We have no views.
What would be the benefit and costs of moving
from a destination to an origin system?
MTIC fraud on the current scale would not be
possible under the origin system. VAT would be payable in the
Member State of export when goods come into the UK so the opportunity
to misappropriate VAT on the full price on an onward sale would
no longer exist. However imposing VAT where goods are imported
from another Member State would have the same effect. The origin
system clearly has both advantages and disadvantages. We doubt
that the existence of MTIC fraud ought to be the driver towards
the replacement of the current destination system by an origin
system.
15 January 2007
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