The Council of Europe took the latest step in its fight against VAT fraud earlier this month when it adopted two new directives designed to tackle the problem.
The first will help national authorities respond rapidly to sudden and massive instances of VAT fraud, while the other targets ‘carousel fraud’ directly.
A European problem
Tax fraud and tax evasion has become a priority for EU leaders, largely because of a growing awareness that the European tax gap is huge - amounting to €1 trillion, according to MEPs.
The tax gap covers not only the tax that is lost to member states because of tax fraud and tax evasion, but also because of tax avoidance schemes or differences between the tax systems of member states.
The issue came to prominence in a high profile meeting of the European Council of Ministers in May this year, when EU leaders agreed that they had to work together in order to tackle tax fraud and tax evasion. They highlighted VAT fraud as an area that could be tackled quickly, given that two directives on the issue were already in the pipeline.
Why is change needed to the VAT system?
According to the Council of Ministers, weaknesses in the EU’s VAT system leave member states particularly vulnerable to VAT fraud, especially when cross-border transactions are involved. This can often have serious consequences for national exchequers.
On top of this, fraud schemes can evolve quickly, giving rise to situations that require a swift response. This is particularly so with ‘carousel fraud’, where supplies are rapidly traded several times without payment of VAT.
Carousel fraud
The amount of money involved in a carousel fraud case can be huge. One 2008 case, relating to the import of mobile phones and computer processing units, involved a conspiracy to steal £38 million.
On that occasion, the goods were imported into the UK, mainly from Dubai via Europe. Then they were sold on through a series of companies, but with VAT added. Once the goods had been sold on a number of times they were exported back to the EU. The exporter would then claim a VAT credit from HMRC for the VAT paid on the purchase of the goods – although this was never paid in the first place.
Changes to current system
Until now, it has been hard to tackle such situations at the EU level. It requires either an amendment to the 2006 VAT directive or the granting of an individual derogation to member states under that directive.
Both require a proposal from the European and a unanimous decision by the Council - a process that can take several months.
The two new directives are designed to speed up the process. They amend the VAT directive in order to:
- Allow member states to apply, on an optional and temporary basis, a reversal of liability for the payment of VAT (‘reverse charge mechanism’) in particular situations, with the aim of closing off certain types of known fraud - notably carousel schemes. This shifts liability for paying VAT to the customers rather than the suppliers involved.
- Create a ‘quick reaction mechanism’ - an accelerated procedure that will enable member states to apply the ‘reverse charge’ to specific supplies of goods and services for a short period of time, by derogation from the provisions of the VAT directive.
Both directives will apply until 31st December 2018. They may then be renewed, but this will require a proposal from the Commission and the unanimous approval of the Council.
If you have been questioned or contacted by HMRC in connection with alleged VAT irregularities and require specialist legal advice, contact our expert solicitors Jeffrey Lewis or Siobhain Egan on 020 7387 2032 or complete our online enquiry form here.
This blog post is intended as a news item only - no connection between Lewis Nedas and the parties concerned is intended or implied.
