Examination of Witnesses (Questions 1
- 19)
TUESDAY 9 JANUARY 2007
MRS SHARON
BOWLES
Q1 Chairman:
Good morning.
Mrs Bowles: I fear you are rather more advanced
than we are in this matter at the moment.
Q2 Chairman:
Not necessarily by any means. It is very good of you to see us.
If we end up asking you things that you just have not got we would
welcome your view.
Mrs Bowles: I think we can have a useful exchange.
Q3 Chairman:
Would you like to start by making a statement or should we just
start with questions?
Mrs Bowles: Just start, I think. The only thing
I can say is, possibly, where we are in this Parliament in that
the report came out in May last year, I think it was. It is not
something that we have to respond to but we decided that we would
be doing an own initiative report, as it is called. The problem
with those is we are only allowed to have six on the go at any
one time which means one has to wait for things in the pipeline
to pass through, and although there is a certain amount of juggling,
and I have in the last few months been agitating somewhat saying,
"I think this ought to be going up the queue a bit",
realistically it is not going to be active in committee until
February when we see off three other own initiative reports.
Q4 Chairman:
When three others drop off the bough.
Mrs Bowles: It was only literally just before
Christmas that I had discussions with our ECON Secretariat about
setting up a hearing where we will invite experts from different
countries to try and get a better pan-European feel for things.
As I said, you are further ahead than we are in this in that at
least you have had some quite useful submissions in from industry.
It is only literally now that my mind is turning to getting ready
for bringing it forward for the first exchange of views in my
committee, which I do not really expect to be before the end of
February or March at the very earliest. That is on the one hand.
On the other hand, the Commission is quite desperate for us to
say something particularly on carousel fraud, which leaves us
in a slightly difficult situation trying to work out how to balance
it because their report extends into other areas as well, excise
duty and direct taxation. So, on the one hand we want to give
a quick response on the things that are urgent and, on the other,
a more considered response on the things that take longer. We
have not even been able to discuss yet as to where the balance
may come down. That is just the background of where we are at,
so forgive me for being vague on some points and recognise that
a lot of it is just out of my head and I am not really, as yet,
able to speak for the committee.
Q5 Chairman:
I am sure it will still be extremely useful because we, of course,
are a House of Lords Committee and our findings do not bind, they
merely get debated. Of course, the United Kingdom is by all accounts
the biggest subject of VAT fraud so we may be able to be useful.
If I could just start, and really it follows on from your introduction,
by asking on what issues is the European Parliament's report into
VAT fraud going to focus? Have you been able to establish whether
there are different views across the Community as to how to tackle
Missing Trader Fraud? Have you done that sort of background?
Mrs Bowles: No. All we have got at the moment
are the reports that we have, for example, as you might discuss
a little later; what has come out of ECOFIN, what are the stances
that the different Member States have taken, so in a sense that
filters through to you and I do know from colleagues how they
tend to line up, but there is nothing different there from what
one might have expected. We need to respond to the points that
the Commission essentially raises, which seem to me to cover the
area of administrative co-operation, and I know you want to talk
about that later on as well. I did wonder whether quite a lot
of the administrative steps that could be taken might well be
within Member State competence to do them anyway, in as far as
they relate internally to one Member State. An obvious thing that
could happen might be tightening up registration requirements
in some way, more ongoing monitoring of companies, I suppose this
is the risk analysis, looking at frequency of reporting, but then
in the UK I believe if you want to have monthly instead of three
monthly VAT returns with good reason that can be demanded. The
other interesting idea is about trying to get authorisation for
large refunds in advance but, again, these would require quite
a lot of updating of the systems so that you could almost be doing
it at the press of a button.
Q6 Chairman:
I wonder if we should start, as you have suggested, from what
happened at ECOFIN.
Mrs Bowles: Yes, possibly.
Q7 Chairman:
I was going to raise it later but maybe that is where we should
start.
Mrs Bowles: My understanding of the situation
really is that Austria and Germany are quite keen on having reverse
charge across the board for everything whereas the UK wants to
have it in sectoral things that are subject to this kind of fraud.
It has happened for some while that we have had reverse charge
in the construction industry and the next move is to mobile phones
and computer chips. My understanding is that at ECOFIN there was
some reluctance to grant derogations partly because of a confusion
that some countries were asking for rather a lot. I understand
France was very concerned that all one might do is decamp the
fraud from the UK to France. That is a valid concern, and I have
heard some lawyers in this area say it is a valid concern, but
almost immediately ECOFIN was over we discovered that France had
suddenly got some missing billions too and they have discovered
maybe they have got the fraud there already.
Q8 Lord Cobbold:
Surely any solution must be a total solution to this problem.
If you just have a derogation in certain commodities in one country
that is going to push the thing either into other commodities
or into other countries, is it not?
Mrs Bowles: I think there is a risk of that
or there is a risk that if you do derogations in one sector then
you just move the fraud into another sector. I am told that in
times past there used to be vans of goods driving around crossing
borders on this side of the Channel. We cannot do it on our side
quite so easily. This is not new. What is new about it is possibly
the scale.
Q9 Lord Cobbold:
The extent of the problem.
Mrs Bowles: And the fact that there are now
possibly more high value consumer goods, like the computer chips,
the mobile phones, that lend themselves to it because of the ease
with which they can be moved around, if they ever are because
sometimes we think it is just a paper trail. I have heard it rumoured
that to some extent the Germans wanted to do something significant
on this in their own Presidency and maybe, therefore, they did
not mind it carrying over. Certainly it is something that has
been mentioned in the context of the German Presidency, that they
are keen to tackle this but, of course, you have to take it that
they are keen on an across the board reverse charge mechanism
and that does have other implications that not everybody is happy
with.
Q10 Lord Blackwell:
I wonder whether one of the starting points for this needs to
be a better understanding of what the scale of the problem is
and whether that is something your investigation might look at.
We have seen figures that put the UK at the top of the league
and even in the UK there is a dispute as to whether it is one
billion, three billion or 12 billion pounds.
Mrs Bowles: Eight billion.
Q11 Lord Blackwell:
There may be something about the physical separation of the UK
that makes it easier to achieve. On the other hand, the UK has
probably got more rigorous reporting systems than many other countries
and it is slightly incredible that there should be such an issue
of fraud in the UK and that other countries—Italy, Greece,
Spain, et cetera—do not have the same scale of problem.
In order to get focused at the European level on tackling this
and what the scale of the problem is, is this something that your
committee might do to try and get to the bottom of this?
Mrs Bowles: I am not sure that we necessarily
have the resources to be able to commission those sorts of figures;
it is something the Commission is better able to do. We had a
meeting with Commissioner Kovacs, I think it was in November,
and he said that he estimated the EU was losing €250 billion
on fraud. To put that in context, that is five times the CAP,
so we can moan all we like about the CAP but there is this amount.
This would mean that the figures for the UK of eight billion,
10 billion pounds, might be the case. I agree with you that the
UK may well have a better system of checking up on this.
Q12 Lord Blackwell:
We may just be more aware of the problem.
Mrs Bowles: Yes. It is hard to believe that
it would not exist in other countries in particular if, as the
Commission sometimes says, a lot of it is organised crime that
is doing this. Why would they target particularly the UK, there
must be other countries especially if their regimes are not as
tight as ours for tracking things down. If it is organised crime
then they are going to go everywhere I would have thought.
Q13 Lord Blackwell:
Which then leads on to our second question here which is depending
on the scale of it and the way it is being driven whether you
think the thinking here will focus on just dealing with the criminality
and trying to stop people breaking the law or whether it needs
fundamental changes to the VAT system, such as reverse charging,
in order to stop that?
Mrs Bowles: It seems to me that we are going
to have to have a double plan, a two stage process. Initially
we are where we are with the VAT system that we have got, which
does seem to be designed to have this loophole if at the point
when you cross the border there is no VAT applied.
Q14 Lord Kerr of Kinlochard:
Can I ask you a question about that. At the beginning there were
quite a few Member States who agreed with the Commission's original
view that the VAT should be charged in the country of origin.
You could argue—the UK has always been against this—that
with the increase in cross-border trade and the increase in proportionate
cross-border trade, which is high value goods now, the arguments
for an origin-based system have increased. That would be a very
fundamental reform which no doubt would have other downsides,
but an upside would be that it would put an end to this form of
crime, would it not?
Mrs Bowles: It would. It is something that I
would certainly want to look at along with other things. It was
the original view of the Commission to do it that way and in the
past the Parliament has been supportive of that view—this
was well ahead of my time here—because to some extent that
is a bit more like other aspects of the Single Market. The problem
comes about from a variety of areas as far as that is concerned
in that if you apply it on the country of origin basis are you
going to continue to do a tax refund cross-border, input and output,
in which case if you are in the UK are you going to try and reclaim
from France, the answer is no, you try to reclaim from the UK
and then there would have to be some kind of clearing system.
I think that was dismissed in the past as too expensive. If this
€250 billion figure is anywhere near realistic then the cost
of running such a clearing system should become viable if one
can recover a substantial proportion of those costs. You could
say why can you not pay the tax in the country that the activity
relates to, it should benefit from that tax, why does it all have
to come at the consumer end, but that would be quite a reverse
of things that were decided back in the 1960s. If one did something
like that and you did not have a clearing system and you just
said, "That was the element that was in France, France keeps
it", it would shift the level of revenues coming into the
different treasuries. I think the original analysis showed that
Germany and the Benelux countries would gain from it. Anything
that is proposed has probably got to be income neutral vis-a"-vis
the Member States because I cannot see any Member State wanting
anything different from that. Looking into proposing that we go
to this country of origin with a clearing system is a possibility,
but that is a long-term solution and we probably need to have
something now even if it is just more derogations, or across the
board derogations, greater co-operation and those things that
can be done, if you like, more or less straight away whilst one
looks further at whether we can get more support for either across
the board reverse charge or going to country of origin. My instincts
are with country of origin, I have to say. Member States also
fear a clearing system for other reasons. It may be is there insufficient
trust in one another's mechanisms? I know on the ECON Committee
there have been several times when I have proposed something be
done in the way that it is done in the UK, let us say, and a colleague
from another party in another country has said, "Well, yes,
I would agree with you if we had the FSA but we do not and, therefore,
we are not quite so happy with that approach". There are
differences. There is suspicion, maybe some people would suspect
that the balancing would not be done properly. I do not think
those are well-founded because you have to have clearing of other
things between countries, between central banks and so on, so
why should this be any different. I think it merits looking at
again.
Q15 Lord Cobbold:
Given the amounts involved it really is important to do something
to increase the priority and find some sort of solution to this.
Would you agree that it has to be on a Community-wide basis to
make sense, individual countries probably cannot solve this on
their own?
Mrs Bowles: That is probably the case. I think
it is a mixture of things. Increased vigilance in each and every
Member State as to what is happening within its Member State has
to help. If one looks at how the VAT registration system works
and whether there is any tightening that can be done there, that
is not oppressive, then that is a possibility, but one has to
handle all these things with care because if one started tightening
up, especially in the area where it is going cross border or you
are trying to check up on "are my supplier companies and
my customer companies going to be honest and pay up their VAT
or are they part of some carousel" you could end up with
a situation where you have quite a chilling effect on trade and
commerce and, indeed, on the Single Market because the chances
are you know the companies in your own country, and so on, maybe
better than ones in other countries. If one starts to build in
a culture of suspicion of one's potential suppliers and customers
through the checks and balances that you introduce because of
VAT fraud then one could end up being very damaging to competitiveness
and not in line with the Lisbon objectives. This is something
I have only just started thinking about having started to look
at possible things that might be done to tighten up.
Q16 Lord Cobbold:
It could require a complete reform of the VAT system.
Mrs Bowles: Yes, but I do not think there is
a willingness in Council for that. I think this is where there
is an institutional impasse that has gone on for many years with
the Commission and the Parliament, for example, being happy to
go to the origin principle and that not being anything that one
could get through the Council because Member States are just so
sensitive in the areas of taxation and revealing more about one
another's taxation to one another. This is something I would quite
like to develop myself in exploring this as to why in this area
where we have these problems should there be such concern, why
can we not trust that a suitable clearing system could be set
up. Okay, I accept there was an expense but now, with the level
of fraud, if that would work then surely it is better.
Q17 Lord Blackwell:
The other option would be to go completely the other way and effectively
replace VAT with a straight sales tax. Paradoxically, as you think
about it, given that now we have low import duties into the EU
on most manufactured goods you end up paying more tax if more
of the value-added is within the EU than you would if you import
a large amount of the material and just finish it in Europe. As
I think about it, if we were reinventing this I am struggling
to think why we would want a VAT system rather than a sales tax
system when a sales tax system would be an awful lot easier to
administer.
Mrs Bowles: I have struggled with that thought
myself in that I think one could examine the whole theory of whether
you even want it as a consumption tax, as I have said. That might
be a very nice theoretical exercise, but—
Q18 Lord Blackwell:
It is not on the radar screen of anyone here.
Mrs Bowles: Things within the EU tend to move
rather more incrementally and that would be pretty revolutionary,
would it not? The sales tax is another idea and I suppose if you
are going to an across the board reverse charge that is what you
have got in the end anyway.
Q19 Chairman:
Yes, fundamentally.
Mrs Bowles: I did pose this question to a couple
of the people from the Commission who are working on this and
I said, "What evidence have we got from countries where they
use a sales tax?", the obvious one being the United States,
and this is something I would like to have a look at independently
anyway. They said that the evidence of fraud through, if you like,
goods disappearing and I suppose going on the black market sales
tax free, they reckoned was quite high and some of the states
in the US were claiming that it was as high as 40 per cent, which
seems staggering because I had not heard about it. I would have
thought that I might have heard about it if it was 40 per cent.
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