VAT News:

VAT Reverse Charging on Mobile Phones and Computer Components

The government's attempts to crack down on VAT "carousel" fraud took a step forward in December 2006 after Chancellor Gordon Brown announced that he had won agreement from France to introduce a "reverse charge" mechanism.

Speaking to the Treasury select committee, Mr Brown said that France's backing meant the scheme would go ahead in Britain, helping to clamp down on the fraud that is draining the government's coffers of billions of pounds.

Last week in the pre-budget report, Mr Brown admitted the government had lost between £2bn and £3bn in the year to last March from the fraud. This is equivalent to nearly a penny on the basic rate of income tax. The Treasury said that the new measure would save approximately £500m in 2007-08.

Revenue and Customs, which recently tripled the number of officials working on the problem to 1,400, said the measure will have a significant impact. Although it is possible that the fraudsters may shift towards trading of goods in other sectors, Revenue and Customs were confident that they were on top of the problem with intelligence teams on the look out for suspicious trading trends emerging elsewhere.

The reverse charge mechanism aims to tackle the fraud problem by removing VAT charging from within the transaction chain so that it is paid only by the end user.

Britain's proposal to introduce the reverse charge scheme within its borders was blocked by France at the finance ministers' meeting in Brussels last month. France feared that such a move would encourage fraudsters to move their crime to other countries and undermine the entire sales tax system.

An introduction date has yet to be announced, but Revenue and Customs said it would give businesses eight weeks' notice before the new rule came into force.

Progress has already been made with the closure of a Caribbean bank used by carousel fraudsters. Customs officials also raided more than 50 addresses across Europe recently, arresting 13 people.

Official figures showed the level of fraud dropped to £300m in October, from more than the £5billion a month in the spring.

CTM, and many within HM Revenue & Customs, believe that this will simply push the fraud into dozens of other products. The fraud has already moved from Mobile phones and computer components into Coca Cola, golf clubs, pharmaceuticals and medical supplies.

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