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European VAT fraudsters are stopped with new reverse charging system

By RJP LLP on 4 September, 2012

Carousel fraud hit the news headlines again last month after the directors of one British company were convicted for faking £1.7m worth of sales from 4m mobile phone handsets through ghost companies in a highly complex, £176m VAT scam. During ensuing police raids, thousands of pounds in cash were discovered literally stuffed into drawers and cupboards.

VAT fraud in particular costs the EU and national budgets several billion Euros every year and to combat its effects, a Quick Response Mechanism (QRM) has been introduced to reduce VAT carousel fraud by switching the VAT liability onto the customer rather than the supplier.

VAT carousel fraud occurs when business owners purchase goods (usually goods that are physically small but of high value such as mobile phones or computer chips) in their own country, recovering the VAT charged on the purchase of the goods as input tax but then re-selling those goods overseas as a VAT free export. This is usually facilitated through a series of transactions involving different companies, charging VAT at each stage before the goods are then re-exported, often back to the original seller. Hence a carousel, because the same goods go round and round between the different companies in a big circle.

Most often the first link in the carousel fraud chain vanishes without accounting for VAT and the final link in the chain reclaims VAT paid from the government before they too disappear.

To protect itself against the effects of carousel fraud, Member States can apply a “reverse charge mechanism” which makes the recipient rather than the supplier of the goods or services liable for VAT. This means the Member State in question can begin counteracting any fraud almost immediately, while more permanent measures are being established. Introducing a “reverse charge mechanism” undermines the whole basis of carousel fraud, by switching the VAT liability to the customer, rather than the supplier. The customer then reports and pays the VAT, deducting this from their taxable income at the same time in accordance with their tax status.

As a form of tax fraud, carousel fraud plagues HMRC, which is evident from the recent publication of their 10 most wanted tax evaders recently. Most of these individuals have been known to be involved in some form of carousel fraud in the past, which illustrates how widespread and costly it is to HMRC.

If you have any concerns about VAT advice and VAT issues please contact Simon Paterson, sp@rjp.co.uk.

 

 

 

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