Friday, January 13, 2006

Head in the sand

In just one short week, we have covered subjects ranging from defence procurement, the (ab)use of academia to produce public policy, the ports and services directive, the denied boarding directive, refuse collection, recycling, food safety, waste of regional funds, nuclear power and energy policy, and the deteriorating situation in Iran.

All these issues are in some way (mostly) directly or indirectly linked to our membership of the European Union and we know that we have not begun to cover the full range of EU-related issues that have broken into the news during the last seven days.

Without even reading our comments on the issues we have covered, however, it must be apparent even to the casual reader now pervasive has become the European Union and how great is its influence in our daily lives – all from something that, in 1970 was "sold" to us as a trade agreement.

In a way, therefore, we can understand why the media, politicians – and much of the population - shies away from discussing the EU and adopts a determinedly head-in-the-sand pose. It is all too much to take on board… too complicated and too depressing.

Even on this blog we feel the strain, for the range of issues is almost too much for even the both of us to deal with. It is, for instance, quite a conceptual leap to be writing, on the one hand, about growing Iranian crisis and then, in this next post, descending from high politics back into the weeds, to deal with something as mundane as Value Added Tax.

But deal with it we must, as it is all part of that ever-encroaching system of government – our government – that we call the European Union. This time – as so often – the story is about VAT fraud, with an unusual twist.

Yesterday, the ECJ ruled that the British government could not refuse to reimburse VAT to bona fide companies which had sold goods to other companies which had turned out to be fraudulent and had not paid their VAT.

According to the version in the Scotsman, the government may now have to change domestic law to accommodate the ruling, with dealt with three British companies, Optigen, Fulcrum Electronics and Bond House Systems. They supplied goods which, unknown to them, later became part of a so-called carousel fraud.

In such a fraud, a trader in a circle of transactions claims back paid VAT and disappears before passing on the repayment. The products may then arrive back with the original supplier who may be entirely innocent.

A British tax tribunal declared that original traders could not deduct input tax on goods involved in the fraud, even where they were innocent parties. The High Court referred the matter to the ECJ which ruled that: "The right of a taxable person to deduct VAT cannot be affected by the fact that, without that person knowing or having any means of knowing, another transaction in the chain is vitiated by fraud."

One can see what the Government was trying to do – effectively trying to offset some of its losses from a type of fraud which costs the country more than £1 billion a year – by dumping the responsibility on traders.

The human cost of this tactic has been serious. One company, Bond House, according to Mobile Europe, was owed £13.2 million by the Revenue and Ian Prescott, founding partner and director of the company, based in Castleford, West Yorkshire, was forced to cease trading. He had to make 20 people redundant and he and the other business directors and their families, he says, "have suffered terribly as a result of the Customs actions."

All this was to protect a system which is increasingly indefensible. In August last year we wrote that, since 1990, VAT fraud is estimated to have cost the Exchequer at least £20bn - another cost attributable to our membership of the EU.

Furthermore, according to the newspaper Sueddeutsche Zeitung, a wave of VAT fraud had been hitting Germany, with suspicions that the proceeds are being used to finance terrorism. And, compared with the UK, costs were even higher, the annual loss estimated at €20 billion (£14 billion).

So vulnerable is this highly complex, bureaucratic tax, we wrote, with multiple payments and refunds, that it is a fraudster's dream, and no sooner is one loophole plugged than criminal gangs find another scam. Were we free agents, the tax would have been long abolished, and replaced with the simpler and less fraud-prone sales tax.

But, of course, since we are not free agents, there is absolutely nothing we can do about this haemorrhage of money. So – rather than the media getting excited – the news passed without the ripple - what's a mere billion quid, eh? - as will this current story. And there is the answer to the EU: keep your head in the sand boys. The trouble is, it won't go away.

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