Supplementary memorandum by the Institute
of Chartered Accountants in England and Wales
INTRODUCTION
1. The ICAEW submitted evidence to the Committee
in October 2006 and in January 2007 (not printed).
2. This paper follows on from the Oral Evidence
to the Committee given by Mr John Arnold and Mr Ian Hayes of the
Institute of Chartered Accountants in England and Wales, and in
particular the evidence of Ian Hayes at Q212-214.
3. The context of this paper is that the
charging of VAT on cross-border supplies would eliminate the opportunity
for carousel or MTIC fraud.
CHARGING VAT ON
CROSS-BORDER
SUPPLIES—A REVISED
ORIGIN SYSTEM
BASED ON
LOCAL CONSUMPTION
4. Pre the 1993 Single Market VAT changes,
the Commission had proposed a "pure" origin system,
under which businesses would charge VAT at their domestic rate
and account and pay that VAT in their own currency to their own
tax authority. Member States would have to use a clearing system
for the balances, either bilaterally or through a central clearing
house run possibly by the Commission. Whilst a "business-friendly"
system, it was rejected by the Member States, principally because
they were not prepared to accept the clearing house system.
5. An alternative solution, which would
avoid the need for any clearing house, would be to allow the tax
charged on a cross-border supply by a business in one Member State
(MS1) to remain in that Member State.
6. So a business in MS1 selling goods to
a business in another Member State (MS2) would charge VAT at the
normal rate for MS1 and account for the VAT due to the tax authorities
in MS1. The business customer in MS2 would pay that "foreign"
VAT to his MS1 supplier, but would be entitled to deduct it as
input tax in his MS2 VAT Return. When he sold on to a customer
in MS2, he would in effect charge VAT on the balance. The process
can be illustrated by a simple example, where a UK business sells
standard-rated goods to a business in the Netherlands, who on-sells
them to a Dutch customer.
|
| | Net
| VAT | Total
|
|
| (i) | UK coy sells €100 of goods to Dutch coy
| €100 | €17.50
| €117.50 |
| UK coy accounts for €17.50 VAT to HMRC in his UK VAT Return.
| | | |
| (ii) | Dutch coy sells goods to Dutch customer for €120 (Dutch VAT standard rate 19 per cent)
| 120 | 22.80
| 142.80 |
| (iii) | Dutch coy accounts to Dutch tax administration in his Dutch VAT Return—output VAT charged
| | 22.80 |
|
| less input VAT |
| (17.50) |
|
| Net payable |
| €5.30 |
|
|
7. So VAT totalling €22.80 is still charged on the
final supply, of which the UK Treasury would receive €17.50
and the Dutch Treasury €5.30.
8. The advantages are:
— As with the "pure" origin system, a
business only has to apply the system he knows and understands
in his own MS, and deal with his own tax authority.
— Since positive VAT rates will be charged on sales,
the scope for carousel fraud on intra community trade is severely
reduced, if not eliminated.
— The tax administration in MS1 will receive the
VAT due on the first sale at MS1's normal VAT rate.
— The VAT and direct tax treatments will be similar,
helping both business risk evaluation and any tax audit.
— The trading activity itself will determine the
allocation of revenue between MSs.
9. There are however some disadvantages:
— Whilst it will not affect the total VAT due, the
system will affect revenue allocation between Member States. Each
MS can be expected to calculate whether it would be a "winner"
or a "loser". But that has to be set against the cost
of operating (ie not having to operate) a clearing house.
— The system will need to cater for the problem
of exchange differences.
— The system will need take account of the differential
rates of VAT applied throughout the EU.
— It would create the opportunity for other tax
frauds, such as fake invoices, but these would be less dangerous,
and easier for tax administrations to counter, than MTIC fraud.
10. A variation on the above suggested by the Commission
and others is the use of a single VAT rate for intra community
trade. We believe this suggestion has merit since it will allocate
revenue on intra-community trade without the distortion that arises
from different rates. If the rate were the lowest permitted standard
rate (currently 15 per cent), every MS would receive tax on intra-community
sales at that rate and (leaving aside zero-rated or lower rated
items), would never have to give a credit for "foreign"
input tax in excess of that charged by the supplier in their own
Member State.
11. To simplify the exchange rate issue, the Euro could
be the currency of accounting with published exchange rates to
be applied in all non-Euro Member States.
23 February 2007
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