Memorandum by the Association of Chartered
Certified Accountants
INTRODUCTION
In simple terms what is being discussed is that
the Government exchequer is being defrauded by the theft of input
tax on cross border transactions. It is very specific and of a
much higher magnitude, generally speaking, than most other forms
of leakage from the VAT system. The opportunity for this largely
occurs because of the lack of VAT on cross-border transactions.
SIZE OF
THE FRAUD
In speaking to HMRC in the preparation of this
short paper it is clear that the size and scope of the fraud can
only be guessed at but is likely to be somewhere between £2-3
billion. This figure is much lower than some of the figures which
mentioned by others but I suspect is actually fairly realistic
because HMRC are "embedded" in the system and are likely
to be much more aware of the intricacies of the fraud.
HOW IS
THE FRAUD
DEALT WITH
AT PRESENT
The clear emphasis seems at present to be one
of using intelligence to stop it and withhold input tax wherever
they suspect that it is about to be perpetrated. The biggest issue
seems to be that there may be many innocent traders who are being
caught up in the fight and are having their input tax withheld.
Feedback we have been receiving indicates that some traders are
moving out of the targeted sectors because they cannot afford
the risk of not receiving back the input tax or being targeted
by HMRC purely because of the business sector they operate in.
SOME POSSIBLE
RESPONSES
The current reverse charge proposal
The proposals as presently anticipated should
make a significant difference to the magnitude and scope of the
fraud. There are however questions over the operation of such
a low de minimis. However we have received informal assurances
that they will operate the regime with a light touch.
A MINIMUM TAX
RATE
Instead of zero rating cross-border transactions
perhaps they should be sold with some tax attached to them: perhaps
10 per cent to 15 per cent (but only on high value low weight
goods such as computer chips and mobile phone simcards). Therefore
the profitability of fraud in relation to such items would diminish
considerably. However such a move would require trust and co-operation
between member states so that the VAT collected was passed through
to the purchasing country.
BETTER INFORMATION
EXCHANGE MECHANISMS
The Commission is quite correct to identify
mutual co-operation as an area which could work better. We wonder
whether there are adequate means for fast cross-border information
exchange. It is very controversial to say but should we be thinking
much more outside the box. Should member states offer direct access
to their data bases through secure links to other member states.
It seems that many times the fraudster manages to execute a fraud
because member states are unable to move fast enough.
GREATER CORRELATION
OF INPUT
TAX AND
OUTPUT TAX
Some member states have put this proposal on
the table. They consider that this is really the only way, other
than through the introduction of an origin system, to deal with
this type of fraud. While the idea is not superficially bad in
reality it will cause businesses huge problems in terms of cash
flow. In addition it will be extremely difficult to have IT systems
which can adequately deal with such complexity.
ORIGIN SYSTEM
The attempts by the commission to introduce
this in the 1990s died due to the lack of ability of member states
to agree with one another and to have trust over the need for
the existence of a clearing bank. We do not believe that we are
any close on trust today with the enlarged EU nor do we believe
that the member states will have the will to agree a common set
of rules and rates which are likely to be needed for traders in
one member state to accurately invoice the customer in another.
CONCLUDING COMMENTS
We do not believe there can easily be a single
solution to the present VAT regime in the EU in relation to missing
trader fraud. If there is no will for an EU wide single VAT system
then by necessity much of our approach will be one of putting
sticking plasters over the problem areas.
22 January 2007
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