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The £40 billion sting

Posted by Richard Thursday, July 26, 2007

In the wake of the House of Lords Report on VAT fraud, the House of Commons Public Accounts Committee have just come up with theirs. The "executive summary" is admirably succinct, and I can do no better than reproduce it here:

VAT missing trader fraud is a large scale criminal attack on the EU VAT system. The most serious form—known as Carousel Fraud—involves a series of contrived transactions, within and beyond the EU to create large unpaid VAT liabilities and fraudulent claims.

The Department has been tackling missing trader fraud for over six years, yet has failed to stem the flow of tax losses: the fraud has continued to cost the exchequer at least £1 billion a year. In 2005–06, the level of fraud increased to its highest level yet, with the estimated cash loss to the exchequer of between £2 to £3 billion.

There are no reliable or comprehensive EU wide estimates of the cost of this fraud because most member states have not produced estimates. The EU Commissioner for Taxation has estimated the annual loss from VAT Fraud across the European Union at £40 billion (€60 billion).

The Department has introduced a range of legal and operational measures to tackle the fraud. The fraudsters are, however, resourceful and react quickly to such measures. In February 2006, the Government sought from the European Union authority to apply a special measure—the “reverse charge”—derogating from the Sixth VAT Directive for a wide-range of electronic goods, including those currently associated with the fraud, such as mobile phones and computer chips.

In principle, once in force, this measure would prevent fraudsters from receiving VAT on the sale of mobile telephones and computer chips and would eliminate the opportunity for the fraud. The Council of the European Union approved the derogation on 16 April 2007, but the Council’s decision only allows the Department to apply the “reverse charge” to commerce in mobile phones and computer chips, rather than the wider range of products that the United Kingdom had originally requested. The Government now expects that this narrower measure, combined with other operational interventions, will protect revenue of £50 million in 2007–08.

The reverse charge can only be a provisional measure pending a more comprehensive Euwide solution. The Commission is in favour of VAT being charged on all intra-community transactions in the country of purchase thereby eliminating VAT free operations and the opportunity for the present type of missing trader fraud. The United Kingdom and some other Member States are not in favour of this system. The Department considers that it would open the way for major new frauds.

Individual Member States cannot tackle VAT fraud on their own. The Department recognises that it has to work closely with the tax authorities of other member states and third countries, as well as with the accounting, tax and legal professionals to tackle the problem effectively. Ultimately the European Union will have to agree a new legislative framework for administering VAT, if missing trader fraud is to be eliminated in the long term.
Although the £40 billion a year loss is somewhat less than the Lords' estimate (which went to £170 billion), this is still a huge amount of money – more than our entire defence budget.

However, one notes that the Committee says the EU will have to "agree a new legislative framework for administering VAT" in order to eliminate fraud. Since the chances of that happening are precisely nil, VAT fraud is set to continue, another of those EU scandals which the MSM seems quite incapable of reporting with any degree of emphasis.

What is wrong with people that they cannot take on board the huge scale of this fraud and the eye-watering amounts that are being stolen? If ever there was an open-and-shut indictment of the way the EU works, this is it. But what do we get? A smattering of low-key reports! I really do not understand what is going on here.

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