Memorandum by the Federation of Technological
Industries
INTRODUCTION
This letter is submitted in response to the
call for evidence issued by the Select Committee of the European
Union, Sub-Committee A (Economic and Financial Affairs, and International
Trade) to support its expanded inquiry into the fight against
fiscal fraud and the issues surrounding Missing Trader VAT fraud.
The Federation of Technological Industries (FTI)
represents companies trading in telecom products and computer
components (traders). Much of the trading activity is in the grey
market of surplus stock released onto the market by authorised
distributors and wholesalers. It is a legitimate industry which
supports significant employment across the UK, contributes tax
revenue (PAYE, NI and Corporation Tax) to UK PLC and creates lower
prices for UK consumers.
Since 2002, the industry has been on the receiving
end of extremely aggressive treatment by HM Revenue and Customs
(HMRC). HMRC are very concerned about large losses of VAT as a
result of carousel or missing-trader fraud, but has found it difficult
to identify, and even harder to successfully prosecute, the firms
or individuals directly responsible for this fraud. This is demonstrated
by the dismal success rate of prosecuted fraudsters against the
magnitude of the alleged MTIC VAT fraud. As an alternative to
the difficult task of catching fraudsters, HMRC have adopted the
simpler approach of discriminating against the softer target,
the exporter, who just happens to be the organisation furthest
away from any fraud and most likely to be a completely innocent/legitimate
trader.
HMRC have pursued, and are enforcing, a policy
of disruption against the trade in general. This policy includes
putting pressure on banks to close traders' accounts, cancelling
VAT registrations, imposing special VAT periods, carrying out
extended verification checks on "exporters", delaying
legitimate VAT repayments and targeting freight forwarders. The
FTI firmly believes that the aim of HMRC's disruption policy is
to close down the industry. To quote the Paymaster General, Dawn
Primarolo, "it is perfectly OK to penalise legitimate businesses
by withholding VAT refunds, because that is much better than making
payments to the guilty".
The FTI welcomes the opportunity to contribute
to this inquiry and hopes that the negative impact of HMRC actions
on legitimate traders will be addressed.
We have circulated your call for evidence to
the whole industry, not just FTI members, and replies have been
consistent. We had 220 visits to our on-line questionnaire and
the responses received have been used to compose our answers to
your key questions.
RESPONSES TO
SPECIFIC QUESTIONS
1. What impact does this fraud have on the
internal market?
One of the anomalies of this type of fraud is
that it encourages activity in the grey market which in turn results
in increased buying power for main distributors and wholesalers.
This improved buying power is normally reflected in distributors
reacting to high street competition by lowering consumer prices.
So indirectly MTIC fraud assists the industry and creates lower
consumer prices.
On the other hand, UK PLC as a whole will suffer
if the scale of VAT fraud is as great as alleged by HMRC. With
this level of loss many public services are surely losing out.
However, destroying the industry is not the answer as the overall
loss to UK PLC will not be resolved as it will result in:
(a) higher high street prices, which will
assist in inflation increases, and
(b) losses of other taxes as large numbers
of jobs are lost and companies close with obvious losses of Corporation
Tax etc.
The most serious impact is the effect HMRC's
activity is having on a legitimate industry:
(a) they have removed a company's basic right
to trade with legal certainty,
(b) with the introduction of Joint and Several
Liability in 2003 they imposed an additional burden on legitimate
traders, and
(c) withholding repayments indefinitely from
exporters whilst fraudsters are allowed to make off with their
spoils.
Missing Trader Fraud seems to have become a
"catch-all" for HMRC justifying delaying input tax repayments
and attacking legitimate, innocent traders on a broad front.
There is an urgent need to define the fraud,
as HMRC now seem to start with the presumption that the whole
industry is fraudulent. The scale of the problem is quantified
with statements relating to "attempted fraud", "possible
fraud" and "losses to the Revenue". Being the only
ones with access to the true picture maybe HMRC should be charged
with providing a comprehensive definition of the problem thus
allowing innocent traders to make commercial decisions on how
they trade. Denying British companies their right to legal certainty
is unjust.
Withholding genuine repayments whilst carrying
out extended verification process has had a major effect on the
industry, with companies having to close and lay off staff.
The fraud and HMRC's activities have created
an atmosphere of distrust amongst traders with the suspicion that
"everyone else" is fraudulent and there is no legal
certainty that honest traders will not be discriminated against.
2. What are the measures currently applied
in the UK and other Member States to combat this fraud and what
are their weaknesses?
In the UK the 2003 Finance Act introduced Joint
and Several Liability which should prove an effective deterrent
to the fraudsters and anyone involved in the fraud. Indeed the
Advocate General commented on ways of tackling carousel in his
judgement in the joined cases of Optigen, Fulcrum and
Bond House as follows:
"The United Kingdom seems to envisage combating
carousel fraud—or at least dispensing with the problems
it poses—by limiting the scope of the VAT system. To my
mind, the Court should not consent to this approach. It would
drastically shift the burden of the problem from the tax authorities
to the private sector, at the expense of legitimate trade and
the proper functioning of the VAT system. Moreover, it would deter
Member States from taking appropriate measures against carousel
fraud. In this regard it is particularly worthy of note that where
an activity falls within the scope of the Sixth Directive, that
does not mean that Member States lose their power to take action
against it. (37) In fact, Article 21 of the Sixth Directive gives
Member States the opportunity to introduce joint and several fiscal
liability. A taxable person can accordingly be held accountable
for the payment of VAT due by his co-contractor, if he knew or
should have known of his co-contractor's fraudulent activities.
(38) Several Member States have adopted measures of that kind
against carousel fraud".
However, HMRC have not implemented this legislation
although they have required traders to comply with the additional
checks and procedures mentioned in Notice 726. This Notice contains
the only published guidance giving any assistance to any entity
wanting to trade in the industry. Instead they appear to be focussing
on the "means to know" theory which is being cited from
the European Court case known as "Axel Kittel v Belgium,
Belgium v Recolta Recycling SPRL (Judgement of 6 July 2006)"
the outcome of which is being misinterpreted for their own objectives.
There are no guidelines in place for such a test and HMRC have
issued no guidance on how they perceive this test should apply
or indeed what steps a trader can take to protect himself.
HMRC have adopted an aggressive policy of denying
all repayments (some for over a year) to any company remotely
associated with the industry, whether the repayment is trade related
or not. These actions appear to have no legal support either in
European VAT legislation or the UK VAT Act. HMRC appears to believe
in the principle of "the end justifies the means". Their
aim is to eradicate fraud, but they do not seem to care about
collateral damage.
HMRC are ignoring recent ECJ judgements requiring
them to act reasonably and proportionately in the enforcement
of their powers/policy.
HMRC continuously generate negative publicity,
with little, if any, facts to support it, concerning Missing Trader
Fraud put pressure on banks to refuse facilities to the industry
and close accounts with little notice, even if some accounts have
been in operation for a good many years. It is for this very reason
that traders ended up with overses bank accounts even though publically,
HMRC put a very different spin on events.
This approach is having little effect catching
the fraudsters.
Measures currently taken are to consider all
companies dealing within the telecommunication and computer component
wholesale industry to be guilty and therefore honest businesses
are treated like criminals. A blanket policy is not effective
in dealing with the individuals involved in fraud.
The current policy is not a measure to combat
fraud, it is a measure to balance the Treasury's books.
Other EU countries, for example the Netherlands,
Germany and Denmark, have a more targeted approach of hounding
the missing traders and prosecuting them. This punishes the criminals
and signals the end of the fraud. This.is a more productive approach
to the easy way out opted for by HMRC.
3. 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?
Any measures to recover unpaid taxes should
be welcomed, although it will be important to ensure that the
effect on legitimate trade is minimised and the interests of the
innocent are protected.
The Fraud is cross-border so it is imperative
Member States work together.
With access to modern technology cross-border
co-operation should be quick and efficient.
Facilities should also be provided to give genuine
traders "early warning" of possible fraudulent/suspect
activities.
4. 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?
The fraud is being carried out in a number of
Member States and requires co-operation between individuals in
different Member States. It is therefore obvious that co-operation
between the relevant authorities in all Member States is required
to combat the fraud.
It is more efficient to fight it collectively.
The Commission must bring forward the proposals.
Individual Member States cannot introduce co-operation without
central legislation.
However, as other Member States have vetoed
Britain's request for reverse charging it seems obvious that agreement
may well never be agreed upon.
The Commission should bring in proposals that
apply equally to all members.
5. Is it necessary to simplify or restructure
the VAT system to prevent this type of fraud? If so, how might
this be done?
VAT is a unique tax as it requires companies
to collect and account for it for no direct benefit to the individual
company, in fact in some industries the potential problems associated
with it is a deterrent to trading. It is obvious that it is time
to review this system.
It is obvious that the more people involved
in processing the VAT within the current system, the more likely
it is that there will be fraud.
To prevent this type of fraud, the VAT system
needs to either be the same rate all across the Member States
and no zero rating allowed, or completely removed. Any other variation
or restructure will simply allow the mutation of the fraud. It
will still continue in one form or another.
6. Does the adoption of measures to fight
VAT fraud at the Community level undermine Member States' control
over the functioning of national fiscal systems?
If the measures require harmonisation of VAT
between Member States this would be seen as effecting control
over the functioning of national fiscal systems but this should
not stop the Commission examining ALL options and reporting on
its findings.
A report should be commissioned to carry out
an overall review of the VAT system. It appears as if the current
system was thrown together too quickly and generated a new litigation
industry with 1,000s of tribunals and High Court cases each year,
many requiring referral to Europe for clarification.
7. What would be the benefits and costs of
moving from the current destination system to an origin system?
Companies would not need to account separately
for goods sold domestically and those exported. It would reduce
the type of fraud in question as long as VAT rates were harmonised
across Member States.
The cost of such a change would undoubtedly
be substantial for industry and governments alike. It could further
result in considerable confusion, many legitimate businesses could
find it tough to cope with.
The benefits are that the current type of fraud
will be removed. The costs are that simply new types of fraud
will emerge. The answer is to provide more resources at State
level and increased cross border partnerships.
However the loss of VAT will not stop. Fraud
will move from one side to the other. Companies will not go missing
anymore, false declaration of VAT numbers and purchasing of products
at zero rate could increase dramatically.
ADDITIONAL COMMENTS/SUMMARY
You will note from the summary of responses
to your questions that most traders support the fight against
fraud. However, we are most concerned about the tactics employed
by HMRC which targets legitimate traders rather than the fraudster.
It appears that HMRC measures have virtually
stopped VAT repayments and the extended verification process has
caused a great deal of hardship resulting in many companies closing
with loss of revenue to the economy and unemployment.
Although we fully support proportionate actions
to combat fraud, we would hope that the policy does not advocate
penalising honest businesses.
Please note that on 9 June 2006 we met with
Mr Mike Eland, Director General, Enforcement & Compliance
at HM Revenue & Customs to discuss the various issues concerning
the industry. In September 2006 we wrote to him and Jonathan Healey
requesting an urgent meeting to discuss HMRC's Extended Verification
process and the detrimental effect it was having on the economy.
Unfortunately, he was not prepared to agree to a meeting, but
preferred to reply in writing. The key issues were:
— How can legitimate traders be safeguarded
in the extended verification process? Whilst HMRC are entitled
to a reasonable time to verify transactions which qualify for
input or output tax, withholding input tax claims only, and for
periods now exceeding 12 months without any Judicial control,
is clearly contrary to our democratic and legal principles.
— The potential impact of current HMRC
actions on the UK economy.
— The inability of the Court System
to cope with the large number of Judicial Reviews, and the consequential
hardship this will cause.
— Safeguards to ensure the basis for
raids on businesses are credible.
Many companies filed claims for damages following
the "non economic activity" policy and the subsequent
ECJ decision in Bond House. There is every chance that similar
claims will follow once the Courts are allowed to scrutinise the
current policy of HMRC who are guilty of playing the judicial
system to their advantage. Whilst publically acknowledging that
traders have no current option but to file for judicial review,
those that take this expensive and time consuming option find
that they are given a decision just before their hearing so that
their case is referred back to the VAT Tribunal thus delaying
the process even further. Sooner or later these actions will be
scrutinised and traders who have done no wrong will be seeking
compensation.
15 January 2007
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