Examination of Witnesses (Questions 180
- 199)
TUESDAY 30 JANUARY 2007
MR JOHN
ARNOLD, MR
IAN HAYES
AND MR
CHAS ROY-CHOWDHURY
Q180 Chairman:
That is a good way of closing a bank, I am sure.
Mr Arnold: Which is actually what has happened.
Q181 Chairman:
It was suggested to us that that might cut 60 per cent of the
problem in Britain, and that made me think, "Oh, well, if
that's all it takes..." Could you comment on that.
Mr Hayes: If you look at this as an issue of
fraud and not as an issue of the problem with the legislation—which
I think is a separate issue which needs to be dealt with—the
major way to combat fraud is to follow the money. We understand
that there are very large sums that have gone missing as a result
of this fraud. The question in my mind is immediately, "Who
is following those sums?" because there must be a trail.
That has started to happen. John was referring to a bank in the
Netherlands Antilles, which figured in a large number of the MTIC
fraud cases we had in this country. It was used because, within
the way fraud operates, if you have to follow normal commercial
practice of monies going from A to B to C, the one thing you are
going to lose out on is the possibility of the fast transmission
of funds so that you can get in and get out quickly without being
caught. This bank in the Netherlands Antilles, was used and transactions
were all carried out within that bank.
Mr Arnold: Allegedly.
Mr Hayes: Allegedly, sorry.
Q182 Lord Giddens:
Your argument that the solution has to be a Community-wide solution
is very powerful really, it is irresistible, but we know it is
not always easy to get agreement between the Member States and
the European Union. Supposing no agreement is reached and we have
to struggle on in the existing situation, what are the limits
of what nations can do? It says in some of the material that the
Barroso Commission says that 1,500 people are being employed to
counter this kind of fraud. Do you know how effective they are?
Are they doing the things you just mentioned in tracing the money?
Could there be sub-regional associations of countries in the way
you seem to be hinting at. You might get a group of countries
in close proximity who would work together in some way.
Mr Hayes: A personal view is that this is criminal
activity. When Revenue and Customs were put together, one of the
issues was the issue of pursuit and investigation of fraudulent
transactions and whether or not SOCA should be employed. If you
look at the involvement of SOCA, it is at the invitation of HMRC
and HM Treasury. What you have here is a fraud of the quantum
that requires the involvement of SOCA because SOCA has the resources.
It has the powers that are necessary to pursue this sort of crime.
That is certainly one of the things I would wish to see happening
very quickly.
Q183 Lord Giddens:
Which estimate of the total amount of money involved do you tend
to side with? There are different estimates of the amount of cost
to the country: some say £2 million and others say £5
million.
Mr Arnold: There would be one hard number that
we have not seen amidst all the estimates. This is the problem.
When you met Commissioner Kovacs, he was talking about €250
billion across the Community. It then turned out that that was
not fraud, it was a combination of fraud and avoidance. Avoidance
is legal. One can debate avoidance for the rest of the week, but
the fact is if you mix the two up the total is not very illuminating.
At the end of the day, one has to look at fraud and then what
is MITC fraud. The one hard figure we have not seen on MTIC fraud
is missing trader. What is the VAT that has been received by those
missing traders? That would be a hard figure because these businesses
have not filed the returns, who has paid them, et cetera? One
would be able to get to that number and one could see; otherwise,
it is all educated guesswork, quite frankly, which is not a very
helpful answer.
Mr Roy-Chowdhury: I would probably side with
the HMRC figure of £2 billion to £3 billion in the UK.
That is probably a fairly realistic figure, given that they are
embedded within the system. I think the measures they are taking
are being effective to some extent but, as I said before, the
criminals are very bright individuals. They are very motivated,
obviously, with the amounts at stake and they are always ahead
of the curve from where HMRC can get to. In some ways we need
to think outside the box. If we are going to not have a single
VAT system across the Union, then we need to think in terms of
better access to real-time data across jurisdictions—which
is unthinkable perhaps where one national jurisdiction, say the
UK, has access to the Netherlands database real-time—so
that we can track fraudsters real-time across borders and try
to stop it. That is really a part of the problem, where the fraudsters
can get away before the national jurisdiction fiscal authorities
can even get the information to deal with them.
Q184 Lord Steinberg:
Two new entrants have a history of irregular behaviour in taxation.
Do you not think they would become prime targets for these criminal
activists to start setting up their carousel from those new countries?
Mr Roy-Chowdhury: I am sure the type of criminals
involved would already have looked at those new jurisdictions
as opportunities for expanding their criminal activities. Yes,
I am sure they would have been looked at and frauds may be being
perpetrated from those new entrants. We are very focused on these
low weight/high value items but I have also heard that in southern
Europe, for example, Mercedes cars are being used in MTIC fraud;
there is the opportunity on the service side to use bogus invoices.
There are all sorts of other opportunities which may be being
used, which are perhaps background noise at the moment and not
being picked up in the mainstream, which are there waiting to
take over even if the UK gets a derogation. I think we need to
be very careful about the sticking plaster approach. If we do
not have a holistic view of how to deal with the system completely,
then there are going to be gaps which are going to be taken up
by these fraudsters, and, as you say, in terms of new jurisdictions
as well.
Chairman: If I may, I would like to try
to move this on; otherwise, riveting though this is, we will not
get through our agenda. Our questions run under two headings.
The first is with regard to the short-term measures that are going
to be of any use in combating this—and I think we have exhausted
some of them—and the second is with regard to the long-term
solutions.
Q185 Lord Inglewood:
Each of you is an expert in all of this. Certainly, speaking for
myself, I am a layman looking at the problem for the first time.
It seems to me that one of the really important questions on which
we need to get an expert view is, given we are where we are, given
we have the European Union, given we have a VAT system, given
the fraud is going on, is it possible, do you think, to deal with
this abuse through essentially administrative measures—and
we have touched on things that would help—or is it actually
the case that there has to be a root and branch reform of the
VAT system and the taxation system, arguably, more widely, in
order to stop this leakage of public money?
Mr Arnold: It depends what you want to do. If
you want to stop the opportunity for fraud, then you have the
root and branch change. You have to change the VAT treatment of
cross-border supplies. If you cannot do that but you want to make
it more likely that fraudsters will be caught, then we can look
at the sticking plasters.
Q186 Lord Inglewood:
What I want to do is to stop this money going walkabout. If that
is your primary purpose, is it possible to do it administratively
in a realistic way?
Mr Arnold: Not in my view.
Mr Roy-Chowdhury: I do not think you would completely
stop it. I think there are ways of mitigating it, which is really
what we are trying to do in terms of reverse charge. The other
thing which I have mentioned is if you could have some level of
VAT which applies across borders. At least that then means, say
you have a 15 per cent rate, that the margin of fraud is 2.5 per
cent. There are other areas, but then you are going to have to
trust other Member States and that is where things start falling
apart. There needs to be a will. This cannot go on. While HMRC
are being fairly effective, as far as they are going, and other
Member States are trying to do the same, there is still an awful
lot of money escaping out of the system and there needs to be
political will just to clamp down on that and perhaps a minimum
rate of VAT is a step they are willing to take.
Q187 Lord Inglewood:
If an artery is cut, you can staunch a bit of blood by putting
on a small piece of cotton wool but it will not stop you dying
from blood loss. In terms of mitigating the loss, is the mitigation
realistically possible, in your judgment, going to be such that
it will make a material difference to the amount of money that
is disappearing or is it frankly all a fig leaf in front of the
nakedness of the underlying system?
Mr Hayes: Contrary to a lot of the submissions
that we have made, where in 2003 we advocated the reverse charge
mechanism at a time when the joint and several approach was adopted
by HMRC in the Finance Act, at that time we felt that would go
some way because we were looking at what had happened with gold
and there were some similarities. Judging by the information that
has been made public by revenue authorities throughout the Community,
this fraud has escalated to an extent that we now do not think
that approach will have any significant effect because it is possible
to apply the method of the fraud to any number of different forms
of goods, so if we get a derogation in respect of chips and phones
we will then have to look at razor blades, which is one area,
or car tyres, which is another. We just cannot keep on specifying
goods. That is not going to work. The fraudsters will now just
go where they can and they are in and out. Conventionally, looking
at registrations has been one of the areas of seeking to control
the fraud. That, in my mind, is not going to produce any substantive
result for the simple reason that fraudsters now are taking over
companies. These are evil men. If you have had evidence given
by HMRC, some of the people who work in HMRC will give you information
about criminal activity involved with fraudsters getting involved
with other registrations and using other registrations.
Q188 Lord Inglewood:
Really you are telling us that we need a root and branch reform
of the VAT system in order to staunch this haemorrhaging of money.
Mr Hayes: On this aspect of it, yes.
Mr Arnold: We have great sympathy for the Committee:
the obvious answer that would do it, we cannot see happening,
and so we then start looking for the less obvious answers, which
are, by definition, less effective as well.
Q189 Lord Inglewood:
Yes, I take that point.
Mr Arnold: That is the difficulty that we have.
Mr Roy-Chowdhury: In some ways in the VAT system,
we are not that far behind getting a harmonised system. We already
have the six VAT Directives upon which all the other VAT systems
around Europe are based, but it is purely trusting other Member
States with your money and getting it back under a clearing bank
system which is really the main stumbling block.
Mr Arnold: It might become preferable to trust
other Member States with their money than to trust fraudsters.
Q190 Lord Inglewood:
One of the problems about the clearing bank system was that there
has been anxiety on behalf of the governments of a number of Member
States about the sovereignty implications of that initiative.
That is what I call a political problem as opposed to a technical
problem.
Mr Arnold: Yes, that is right. Please stop me,
my Lord Chairman, if I am straying into the wrong question, but
that is why the Commission come up with the One Stop Shop.
Q191 Lord Inglewood:
You have identified the important issue here.
Mr Arnold: We have identified that issue. The
problem with a One Stop Shop is that it is actually a 27 Stop
Shop and would be very distortive for intra-Community trade.
Chairman: It is inevitable that we stray
in and out of questions in a session like this.
Q192 Lord Jordan:
I am coming in now because you have just been talking about the
area I was going to ask you about. You have made it abundantly
clear to us that the small tweaks, the sticking plasters, are
not going to tackle this. You have also said—and I do not
think there is any doubt about the truth of what you have said—that
the sort of draconian measures that would be needed would not
be politically acceptable. We are going to look at something pragmatic
at the end of the day. We realise that one is not good enough;
the other is not acceptable. Could you give us three things that
in your view would be politically acceptable which would have
the biggest impact on the present methods of fraud in this area.
Mr Hayes: (i) I think setting up a pan-European
taskforce, with members from the revenue authorities of every
Member State, specifically to deal with this; (ii) the Commission
taking on responsibility for setting greater parameters for the
monitoring of intra-Community trade; and (iii) viewing the criminal
abuse of the system as a criminal activity and dealing with it
as such and not as something that needs to be rectified by changing
fiscal law.
Mr Arnold: If we look at the UK, if the current
computer systems could cope within HMRC—and that is not
a jibe but a serious point, because they are archaic, there has
been a lack of investment—then we could look at the credit
limit point that we have made to the Committee. We could also
look at—a little like when you have a credit card—an
authorisation system when you want to carry out a large transaction,
but that would have to be in real-time. It is no good writing
off or having to write off and hear back a month later: because
you are a business, you want the answer as to whether you can
go ahead in 15 seconds—which is what the credit card companies
do when you are standing in the shop. We could do that. Thirdly,
as we have said in our paper, we could do more to control the
transfer of ownership of the business or the activity of the business
and have a reporting requirement on that. We are very conscious
about continually transferring the burden to taxpayers or to businesses
because then you create costs and you create a distortion in the
way business is done. If we had the One Stop/27 Stop Shop, we
would see a reduction in intra-Community trade and we would see
an increase in imports, because businesses would route those out
of the Community and back in in order to avoid the risks of the
system. But that is a separate question.
Q193 Lord Cobbold:
How can we persuade the politicians? How big a loss does it require
before we can avoid this sticking plaster approach and concentrate
on making some long-term improvement?
Mr Roy-Chowdhury: I think that is really a judgment
call for politicians. When the origin system was being debated
and discussed in the nineties, it was at the time of the convergence
for the single currency. There was a real issue, probably as far
as the UK was concerned, in terms of getting the money back out
of the clearing bank system. Maybe there is less of that critical
concern about the clearing bank now. With the amounts involved
in MTIC fraud -if there is perhaps €100 billion across the
European Union in fraud, a figure which is being bandied about—then
is that enough? It is really a question for politicians. We also
need a flexible system where different Member States can have
their own rate of VAT. They can have their own zero rates, they
can have their exemptions. All that was in the mix in the origin
system debate before which made it untenable and unappealing for
the UK, does not have to be. There was a political dimension at
the Commission level at that time, looking at the origin system,
which hopefully is less prominent now and so there might be a
greater opportunity of looking at the origin system today.
Q194 Lord Cobbold:
Presumably you would like this Committee to advocate a long-term
solution. Do you think the origin system is still the best one
to go for?
Mr Roy-Chowdhury: One that does not raise VAT
levels, yes—which I think was the main concern before with
the origin system and today we have more of a pragmatic, business-friendly
environment.
Q195 Lord Cobbold:
The computer system is not that impossible to create now. It is
probably easier than it was a few years ago.
Mr Roy-Chowdhury: Quite. I entirely agree with
that.
Mr Arnold: It is what the banks do every day
of every month: release transfers of funds and so on. I think
the missing voice in all these discussions has been business and
how that can be aired. We are not immune to what is happening
in the political world and we can see perfectly well the problems
of an origin system in political terms. But if you are just looking
at a business, perhaps a small/medium sized enterprise which gets
an order for the first time, what is the easiest way in which
they can do business with someone in another Member State? If
you say, "In order to put the glass back into the window
we will have to charge VAT," the answer is clearly to them,
"You have to charge VAT at the same rate as you charge it
for a supplier within the UK—which you are already doing—and
you account for it in the same way." That is very easy for
the business. It is not so easy for the state, because it then
means that if you are going to transfer balances, which is another
point, you have to have the clearing system. But if you are going
to say to that business, "No, what you have to do is to find
out the VAT rate in that other Member State"—and there
are 26 of them—"make sure that VAT rate is up-to-date"—if
you look at the paper from the Commission it is 37 pages long
on VAT rates; some countries have three VAT rates for the same
type of goods, so there are classifications within that, it is
not broken down within that paper—"and then invoice
the VAT. Your invoice has to comply with the rules of that other
Member State and you then have to pay that VAT"—in
the UK it will always be a foreign currency—"to the
tax authority in the other Member State. Depending on the law
of that Member State, you could be held jointly and severally
liable for the VAT if your customer does not account for it"
then, quite frankly, the cost of finding this out and the cost
of keeping up-to-date means that any sensible business or any
sensible adviser would say, "What is the profit involved
here? Don't do it this way. Don't do the deal." You cannot
load control after control after control on business without having
a reaction. Larger businesses, you say, maybe can cope, but most
computer systems cannot take another 27 VAT rates without major
amendment—at least 27.
Q196 Lord Cobbold:
Now you are saying it is too complicated to be realistic.
Mr Arnold: You could see that technically you
could get an answer. You could see that possibly politically,
if you got guarantees from Member States and the Commission kept
an up-to-date register and that was binding on all Member States
and so on, you might be able to have a system, but from where
we are now that is verging on utopia. Charging VAT cross-border,
if you are going to look at it from the perspective of the business,
the only practical way is at the rate of the country you are in,
rather than getting suddenly exposed to the tax systems of other
Member States. It would be a complete nightmare if you got a Bulgarian
assessment as a small UK business. How on earth do you start to
deal with that? It is enforceable in the UK by the UK tax authority
with mutual assistance. To use the words of my sons "you
wouldn't want to go there."
Q197 Lord Cobbold:
The reverse charge system would not work either.
Mr Arnold: The cross-border reverse charge system,
as opposed to the domestic one. Effectively, the transitional
system is a cross-border reverse charge and that is what is causing
the problem. The domestic reverse charge does not help because
of the conditions you have to meet in order to apply it. Even
in the UK law, the 2006 law, we have one impossible and one almost
impossible test for businesses to meet.
Q198 Chairman:
This inquiry is now straying uncontrollably through long and short-term
measures to fix it.
Mr Arnold: I am sorry, my Lord Chairman.
Chairman: Not at all. It is not your
fault; it is the fault of the nature of the discussion.
Q199 Lord Inglewood:
You could deal with a lot of the administrative problems which
are the nightmare you have described by having a much more harmonised
VAT system. I know in a different area the European Union is interested
in the standard form for dealing with the import and export of
works of art. If you had a standard European-wide set of rules
with standard forms, you would in fact substantially mitigate
a lot of the difficulties you have described, albeit there may
be political problems. Is that correct?
Mr Arnold: Yes, provided the interpretation
of the tax authorities and the courts in the Member States was
the same.
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