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The reverse charge aimed at preventing carousel fraud will be introduced on 1 June 2007. The measure is an important part of the Government's strategy to tackle missing trader intra-community fraud. HMRC have in addition committed 700 additional staff, now using over 1,500 staff to identify and tackle the fraud and those involved in it.
Under the reverse charge procedure, the supplier of the specified goods does not account for the VAT on sales when selling to other VAT-registered businesses, instead it is the responsibility of the purchaser of the goods to account for the VAT. Provided that the purchaser has correctly done so, he can recover this VAT in the normal way. The Government announced in January 2006 that it had sought a derogation to introduce the reverse charge, and legislation was included in last year's Finance Act, enabling the reverse charge to be implemented on agreement of the derogation. HMRC have been working closely with businesses to prepare for this change, and will shortly issue detailed guidance and draft legislation.
The derogation covers two categories of goods:
- mobile telephones;
- computer chips/microprocessors/central processing units.
In reply to a recent written question asking if the UK had made any concessions in return for EU approval of the reverse charge in the UK, Ed Balls said that 'after discussions with European partners and UK businesses, the Government decided that the derogation should run for two years rather than three, after which the UK can apply for it to be renewed, and that the scope of the reverse charge should be restricted to mobile phones and computer chips which are the goods most commonly used in MTIC fraud. In addition the Government decided that a de minimis level of £5,000, rather than £1,000 as originally envisaged, is sufficiently low to deter fraud in these goods, while ensuring that those supplying very small quantities of these high value goods do not need to use non-standard VAT accounting rules. Some Member States were also particularly concerned about the fraud moving to them, so we have agreed to enhanced co-operation measures'.
A recent report from the International VAT Association is not convinced that the reverse charge mechanism is the answer to VAT fraud. It says that 'the fraud industry thrives on the differences in national approaches to tax fraud' and suggests that Member States should concentrate on 'fiscal co-operation and information sharing'. For further information, see www.iva-online.org.
HMRC news release dated 19 March 2007; Hansard, 23 March 2007, vol 458, no 67, col 1221W
