Examination of Witnesses (Questions 20
- 39)
TUESDAY 9 JANUARY 2007
MRS SHARON
BOWLES
Q20 Chairman:
Absolutely, yes.
Mrs Bowles: I am not saying they were telling
fibs, I think they chose the most extreme case, but I think the
US is the obvious place to look for some of their statistics on
sales tax to see what does go missing and how. The other point,
I suppose, is people are then concerned that you have not got
the incremental aspect, if the trader or the retailer goes bust
at the end of the chain then all of the VAT goes missing or all
of the sales tax goes missing, whereas with the system of input
and output you have usually collected something along the way
before it goes bust unless you end up in the missing trader situation.
Q21 Lord Kerr of Kinlochard:
That is clearly right. On the other hand, a sales tax system is
much simpler.
Mrs Bowles: Yes.
Q22 Lord Kerr of Kinlochard:
Simplicity maybe has advantages.
Mrs Bowles: It depends whether the fact that
at the warehouse stage the goods are all VAT free causes greater
incentives for disappearing goods and without some kind of statistical
analysis I cannot call that. Possibly if the Germans and the Austrians
are as keen on reverse charge mechanisms as they are purported
to be they will have done some investigation into this already
as to how it might happen within their own countries anyway and
we could dig that out.
Q23 Chairman:
Can I just have a little prod at the whole question of reverse
charging. If enough of us seek a derogation we have changed the
system, have we not?
Mrs Bowles: Yes.
Q24 Chairman:
I take it that if the extent of fraud is as bad as we think, and
the UK is only admitting to something between £3.5 and £4.7
billion in the Autumn Statement, but I think we all think it is
probably a bit worse, if enough of us do this then we have changed
the system. I suppose I conclude that if it is as bad as this
and if fraudsters, as we know they do the minute you tighten up
enforcement in one country or reverse charge in one country, move
to another, incrementally we have arrived quite quickly at a sales
tax. How is your report going to work? I can see that it must
be going to cover the various methods of tightening up or enforcement.
There will be a perfectly good report to be written that says,
"We have all got to do this, tighten up and enforce",
but then there are a lot of people out there with derogations.
If I were writing this report I am not quite sure I could see
how I would proceed either.
Mrs Bowles: I think that is why the Commission
are waiting to see what we will say because they are not quite
sure how they want to proceed either. We know the problem, we
know how it comes about and there have been some very good expositions
on this in some of the submissions to your own inquiry, the question
is how quickly do you clamp down. It is an interesting thing that
if maybe instead of an individual country saying, "We want
to derogate for mobile phones", the whole of the EU said,
"Okay, let's have a derogation on mobile phones", instead
of it being mobile phones in the UK and something else somewhere
else, you would have the interesting scenario in a sense of for
a while some goods being reverse charged and some not if you said
"It is totally reversed for those goods" and you could
end up with a rather mixed system that is a bit confusing. One
advantage of doing it in a piecemeal way like that if it did move
towards a total reverse charge system is that it would soften
the blow that the treasuries would receive because if you go to
reverse charge they are going to get delays in receiving their
money. Under the present system they have been getting some as
it goes along. I do not know whether anybody has done a computation
of this but it is something I would ask the Treasury, that if
they switched to an across the board reverse charge what is it
going to do to their cash flow. It may be that it is not so much
because whilst it is in the supply chain it is going on both sides
of the VAT return, so it may not be as big as I fear but I strongly
suspect there could be a bit of a cash flow problem that might
be significant to treasuries there. Going in a piecemeal way would
soften that.
Lord Blackwell: I do think conceptually
there is a problem with trying to specify bits of equipment that
reverse charges apply to. You could just imagine you ban mobile
phones so it moves on to MP3 players, you ban MP3 players and
it moves on to small flat screen TVs or whatever it is. There
is always going to be a new product and the law will continue
to be running to catch up.
Q25 Lord Cobbold:
And to services as well.
Mrs Bowles: I have noticed that people are saying
there is this risk of carousel fraud happening within services
but I have not got my head round how that happens. Again, that
is something I would like to know more about so maybe I will ask
some of the accountants and auditors who are involved in these
things because if that is the case obviously it is easier to carousel
services where nothing moves than it is a mobile phone or a chip,
in which case one would presumably big time be having to look
at things that—
Q26 Lord Blackwell:
It is probably easier for a fraudulent trader to prove that they
have had a cargo of phones going through than to prove they have
delivered services worth umpteen million pounds.
Mrs Bowles: Yes. You have got to be quite a
big professional organisation to deliver services of that nature,
so you are going to be regulated by other means or have other
constraints upon you, that was why I was curious about them saying
that. I was wondering whether it was more to do with things like
mobile phone services, the telephony services, and could bandwidth
be going round in a carousel kind of thing. That was the only
thought I had, as to whether those were the kinds of services
they were thinking of. It is something we have to look at. I think
the Commission is hoping that we will come up with a suggestion,
"Well, these are things you can do now, so go and do them
now, and these are things we need to have more detailed work on
that are longer term". For example, say we had agreement
in principle and we knew the Member States were happy to change
the VAT system, how long do we think it would take the Commission
to draft it and come up with a proposal and for it to go to the
Parliament? We would be into the next mandate. I cannot see anything
like that happening on less than a five year cycle.
Q27 Chairman:
Perhaps this is the moment for me to ask a question about enforcement
type things that could be done. We wondered about the introduction
of "joint and several liability" for firms which are
acting legally but inadvertently trading with a fraudulent person
down the road, placing the liability on the firm, as it were,
to make sure they are not engaging in carousel fraud. Is this
the sort of thing that the Commission is likely to see as a proportionate
response or are they going to think we have all gone mad?
Mrs Bowles: They mentioned it in their paper
but pointed out that you have to sail within the ECJ decisions
and there is a problem there in that what came out of the ECJ
was not terribly clear on that, it tended to be rather subjective
rather than objective, so how is a firm supposed to have certainty.
I think it was on thinking through this that I came to the point
that I rehearsed a little bit earlier, that if you are in business
and you start having to check out the credit worthiness of your
supply chain on both sides in order to demonstrate that you did
a credit check, so that you can be deemed not to be responsible
because you did the checks, that is a huge change to the way business
is done and, frankly, for small businesses it is going to be difficult,
or you are just going to have pieces of paper exchanged that do
not mean anything.
Q28 Chairman:
A risk assessment.
Mrs Bowles: Having run a business myself, I
know that every now and then I would go and try to buy something
from somewhere and all of a sudden they would want references
as to whether I was credit worthy or not. It was actually quite
a nuisance and one chose to go and get it somewhere else. It was
particularly irritating when you were trying to pay cash for something,
or not cash but a payment that was not going to be bounced in
any way.
Q29 Lord Blackwell:
This is the last resource of governments really, is it not, to
try and impose the burden of running the tax system.
Mrs Bowles: Yes. I have to say I think that
the UK has been very overbearing on this and even despite the
ECJ judgments it comes to my ears that there are instances of
closing down on firms. You only have to have the finger of suspicion
pointed at you to not get your VAT refunds and business stops.
Q30 Lord Kerr of Kinlochard:
I understand why the Court of Justice were not attracted by joint
and several liability, and the Commission, say they would be prepared
to look at it but only against the background of that case in
the Court, so clearly they are not going to go down that route.
They seem to stress that the short-term requirement, say within
your second category, things that could be done now, is for better
mutual co-operation between Member States. I would like to draw
you out on how you think that would work. They talk about an "e-monitoring
system, on the basis of quantifiable indicators, in order to ensure
that each Member State is able to and actually does provide efficient
assistance to other Member States". Is that the tip of an
iceberg of real ideas or is it a pious hope? How would an e-monitoring
system on the basis of quantifiable indicators deal with, say,
the problem of carousel fraud? I cannot conceptually get it.
Mrs Bowles: I am not sure that I can in some
respects. When I read through that again I was confused as to
whether they meant that to apply to the VAT situation or whether
they were talking about the direct taxes situation because if
you look at the relevant part of the paper it also said that they
thought as far as VAT was concerned it would work in quite well.
That was on page five, section 2.4. It says: "The Community
legal framework in the field of administrative co-operation on
VAT and excise duties as such appears to be satisfactory from
the Commission's point of view. Even if improvements on specific
points may be necessary..." I think they think they have
got sufficient of a legal framework there but maybe more could
be done. Then the part that you mention, I think, is over the
page, on the top of page six, where we get on to the monitoring
system in avenues to explore. I am not quite sure whether that
is meant to be generic to all areas because later on down that
page they go on "As regards VAT" as if the last bit
was not VAT, so I am slightly confused as to what might be going
on there.
Q31 Lord Kerr of Kinlochard:
What is clear is they end up on page 10 saying: "...at this
stage fraud could better be controlled through joint action by
the Commission and Member States and through an efficient and
modern organisation of the control system". I have not seen
in their paper a description of that efficient and modern control
system.
Mrs Bowles: No.
Q32 Lord Kerr of Kinlochard:
If carousel fraud is on the scale of the estimates that we hear
about, I do not see how just doing what they are doing now better,
in the form of mutual co-operation between national fiscs, is
going to deal with the problem.
Mrs Bowles: I am not sure about that either.
It would seem to me that in detecting carousel fraud what is important
is speed of information, which means the Member State where the
refund is being sought, because that is the trigger where you
might notice it, so anything that can speed up, if you like, being
put on alerts that "here is a big request for a refund, is
this a new organisation" and so on, possibly at that stage
if there has been a cross-border movement of the goods you might
want to suddenly check upon what the nature of the firm is in
the first country and that there may be some greater assistance
there. Realistically you are not going to pick it up whilst you
are on three monthly VAT returns unless you can move to some kind
of more real-time system within a Member State so that you get
authorisation for big refunds, which would take away the onus
from the adjacent businesses if they were innocent. It seems to
me that instead of putting the onus upon them to be doing the
checking you should probably be putting the onus on to the administration
on the basis of "if this much money is going missing it should
pay for itself". Then if you are in one of these carousels
where it is jumping over the border, going round several times
and all over the place and you are trying to track the people
down in terms of the fraud aspects, you need to link up with other
countries. I am not quite clear how having more numbers about
the amount of trade that is going on between certain Member States
is necessarily going to alert you all of a sudden to a trader
because surely it is going to be submerged unless you have a horrendous
VAT return to do where you are going to be listing every person
that you have dealt with and then who is going to be inspecting
these. Unless you are realistically saying we have got to go to
some really heavyweight everything is on-line, real-time with
advanced data mining techniques going on all over it, that might
be possible some time in the future but I really do not think
we are there yet.
Q33 Chairman:
Can I just pull this together because, unfortunately, we are running
out of time. Impliedly, Mrs Bowles, you have said to us that you
do not really think this is something that can be tackled individually,
it has got to be done EU-wide.
Mrs Bowles: Yes.
Q34 Chairman:
That is where we start, if you like.
Mrs Bowles: Both in terms of co-operation and,
of course, if we have a significant review of the system then—
Q35 Chairman:
It is not individual states?
Mrs Bowles: No.
Q36 Chairman:
There has been a tendency to say to the British, "It's all
your own fault, get on with it".
Mrs Bowles: I think quite often there are things
going on that we have detected that other countries have not detected
yet. I have found this in other directives. On the Payment Services
Directive most Members here are saying they do not have money
remitters in their countries.
Q37 Chairman:
Oh, yes they do. We hoped to find time to ask you about the other
issues that the ECON Committee will be looking at in 2007 but
you are joining us later and maybe we can do that then.
Mrs Bowles: There is plenty going on.
Q38 Chairman:
We can do that informally because we would be very interested
particularly in the question of the future funding of the EU and
is there a consensus.
Mrs Bowles: I am not sure that is an ECON issue,
I think that is more budgets and constitutional.
Q39 Chairman:
If you have any got any clues we would certainly be interested
in hearing what else the ECON Committee is looking at because
this could readily guide the work of this Committee.
Mrs Bowles: There is a list of things I have
done so I can bring that along.
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