Supplementary memorandum by HM Treasury
and HM Revenue and Customs
Q1. What impact does this fraud have on the
Internal Market?
Missing Trader Intra-Community (MTIC) VAT fraud
is an organised criminal attack on the EU VAT system. The simplest
form of the fraud—known as acquisition fraud—involves
obtaining a VAT registration number in one Member State for the
purposes of purchasing goods free from VAT in another EU Member
State, selling those goods at a VAT-inclusive purchase price in
the UK and then going missing or defaulting without paying the
VAT due to HMRC. Simple acquisition fraud can lead to market distortions
because the fraudster, who has no intention of paying VAT, is
able to undercut legitimate businesses trading in the affected
markets.
A more abusive form of the fraud—known
as carousel fraud—involves the same goods being traded around
contrived supply chains within the EU, and re-entering the UK
on a number of occasions with the aim of creating large unpaid
VAT liabilities and fraudulent VAT repayment claims on each occasion.
This often involves over-valued supplies in order to maximise
the VAT involved, but the impact on the legitimate markets for
the fraud is relatively small because of the closed nature of
the contrived transaction chains operated by the fraudsters. However,
the very scale of the fraud can damage public finances and distort
trade statistics owing to the fact that the same goods in a carousel
are recorded each time they leave the UK artificially inflating
UK exports. In addition, carousel fraud can disrupt the timely
delivery of new products to the retail market as these are used
within the carousels. Whilst many Member States do not publish
the scale of losses in their particular jurisdictions, MTIC fraud
is recognised as a common problem and it is clear that losses
from this type of fraud are experienced across the EU.
The Government estimates that the scale of attempted
fraud against the UK in 2005-06 was between £3.5 billion
and £4.75 billion, with an estimated negative fact on the
VAT receipts during the year of between £2 billion and £3
billion.[1]
Q2. What are the measures currently applied
in the UK and other Member States to combat this fraud and what
are their weaknesses?
HMRC's strategy for tackling MTIC fraud has
been in place since September 2000. It aims:
— To stop the fraud before it can begin
by introducing risk based controls to identify bogus businesses
and refusing to register them for VAT purposes;
— Where fraudulent trading begins,
to identify and stop it at the earliest opportunity—by operating
close audit and verification controls on suspect businesses and
those trading in affected sectors; and
— Where it cannot be stopped, to disrupt
the fraud—by tackling all points of the supply chains and
using the full range of criminal and civil measures available
to target those orchestrating and/or facilitating the fraud; and
by working closely with UK and overseas agencies to identify and
target suspect trading and money flows.
As the patterns of fraud have changed, HMRC
has adapted and strengthened its MTIC strategy accordingly, key
changes being:
— redeploying almost 700 additional
compliance officers to verify VAT repayment claims submitted by
those trading in suspect supply chains;
— strengthened international co-operation
with both EU Member States and non EU countries;
— introducing legislative measures
in last year's Finance Bill to clarify and strengthen UK powers
to tackle MTIC fraud; and
— applying to the European Commission
for a derogation to introduce a reverse charge accounting procedure
for the goods most commonly used in carousel fraud.
The reverse charge would effectively remove
the physical payment and repayment of VAT from business to business
transactions, thus removing the opportunity to steal VAT. Following
the UK's application for a derogation from Community VAT law,
the European Commission has come forward with a corresponding
proposal, which is subject to adoption in the Council, by unanimity.
Discussions are ongoing, but the Government expects to implement
the reverse charge eight weeks from formal agreement.
The main challenges for HMRC's strategy are
the speed with which the fraudsters can change their tactics in
response to HMRC interventions, and their ability to disguise
their activities to resemble legitimate trading. This requires
HMRC's strategy to be very flexible, finding a balance between
effectively targeting the relatively small number of fraudsters,
while minimising the impact of that activity on the vast majority
of the 1.9 million VAT registered businesses that trade legitimately
in the UK.
Having good and timely evidence about those
involved in the fraud and their tactics is the key to getting
this balance right. It is important for the UK to continue to
share intelligence and work with our EU partners and the European
Commission to tackle the fraud. HMRC is hosting a conference of
EU partners on 21 February, aimed at strengthening the arrangements
for sharing such intelligence in support of both criminal investigations
and civil interventions.
The measures currently used by the UK to combat
MTIC fraud are also available to all other Member States, and
will be used in proportion to the scale and nature of the attack
that each State faces.
Q3. The Commission has suggested measures
including increased cross-border liaison by Tax and Law Enforcement
Authorities and Governments, improved risk management, and mutual
assistance by Member States wishing to recover unpaid taxes. Are
these mechanisms adequate?
The recommendation to improve EU mutual assistance
is to be welcomed. This would be achieved at a number of levels,
including improvements to the IT infrastructure to exchange information
and better application of procedures contained in existing legislation
that are currently under-resourced. There is also a need to look
more closely at the overall quality and speed of VAT information
that is currently exchanged to ensure there is greater focus on
more rapid and direct exchanges in high risk areas. A small Member
State project team to look at this issue is in the process of
being created, and the UK welcomes this positive step.
The Government is determined to tackle MTIC
fraud, and for this cooperation at a European level is vital.
However, it is important for Member States to explore the full
range of options including measures such as a reverse charge or
the taxation of intra-community trade, along with other options
not specifically mentioned by the Commission, such as enhancing
Member States' ability to refuse repayments in cases of fraud.
Q4. Are Member States, within the context
of the Internal Market and the globalised economy, capable of
fighting individually against this fraud or is it right for the
Commission to bring forward proposals on their behalf?
MTIC fraud is an EU wide problem which can only
be tackled through a range of solutions, both domestically and
at EU level. Member States need the flexibility to deploy their
resources and domestic tools in proportion to the nature and scale
of the attack that they are facing. The UK is already making progress
through its package of measures, which address the fraud throughout
all the stages in the supply chain. In addition we are confident
that the Commission and Council will soon adopt a proposal which
would allow the UK to derogate from Community VAT law, and introduce
a domestic reverse charge for the specific goods targeted by the
fraudsters. However, we recognise that tackling the fraud requires
EU wide cooperation, and as such we welcome the ongoing discussions
within the EU following the production of the Communication from
the Commission on combating tax fraud, and, in particular, support
the need to improve mutual administrative assistance. We also
welcome the opportunity to discuss ideas based on strengthening
the ability of Member States to combat fraud through changes to
EU VAT law and improvements in the practical application of existing
legislation where co-ordinated action is required.
Q5. Is it necessary to simplify or restructure
the VAT System to prevent this type of fraud? If so, how might
this be done?
The EU VAT system benefits many millions of
businesses and consumers, and the basic rules—that sales
between registered traders in different Member States are normally
VAT-free, and VAT is charged on subsequent sales within the Member
State—are well understood and properly applied by the vast
majority of businesses both within the UK and across the EU. MTIC
fraud is an organised criminal attack on the VAT system. It is
important that any measures to tackle that threat are properly
targeted at those orchestrating or facilitating the fraud and
the methods that they use. Anti-fraud measures should not undermine
the benefits of the Single Market.
Q6. Does the adoption of measures to fight
VAT fraud at the Community level undermine Member States' control
over the functioning of National Fiscal Systems?
The Commission has put forward several approaches
to combating carousel fraud, from strengthening existing practices
regarding mutual assistance, to more fundamental changes to the
VAT system, which could involve either a move to an origin system,
a reverse charge option, or a single rate of taxation for intra-community
trade. Several of the measures suggested by the Commission would
improve Community legislation and procedures, which would support
and enhance the ability of Member States to combat fraud. However,
the UK will oppose any move to an origin system that would undermine
the basis of VAT as a consumption tax, and will look carefully
at all suggested solutions to ensure that they do not undermine
the functioning of national systems.
Q7. What would be the benefits and costs of
moving from the current destination system to an origin system?
The suggested move to an origin system, where
VAT is charged on all goods and services in the Member State of
the supplier, has a number of problems. Firstly, to prevent businesses
relocating to the Member State with the lowest rate of VAT, an
origin system would necessitate a high level of harmonisation,
not only of the VAT rates themselves, but also to the basic elements,
such as input tax rules. This would seriously undermine the ability
of Member States to set rates and rules in accordance with their
own social and economic needs, and in the UK would present a direct
threat to our zero rates. Many Member States have long recognised
this threat to their sovereignty and, coupled with the necessity
for a pan European revenue redistribution mechanism which would
itself present enormous technical and practical challenges, would
reject any move to an origin system.
Secondly, new fraud opportunities would be created
by the cross-border nature of the supplies. These are the opportunities
that would arise with any taxation of intra-community business-to-business
trade, whether charged at the rate of the Member State of the
supplier, the purchaser, or at a single pan European rate. It
is the task of the Commission and Member States to arrive at a
practical solution to MTIC fraud that minimises new fraud opportunities.
16 January 2007
1 Bond House et al, joined cases C-354/03,
C-355/03 and C-484/03. Back
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