Carousel fraud is a growing problem for the UK and Europe. The Treasury is set to lose £2 to £3bn in the tax year 2005/06 according to the Public Accounts Committee. Across the EU as much as £40bn annually could be going missing, according to EU tax commissioner László Kovács

It's too early to say if, in the UK, the reverse charge mechanism, which transfers the obligation to account for VAT from the seller to the purchaser, for certain products supplied within the UK, is reducing these massive losses, although HMRC says it is making progress.

What is needed is a co-ordinated, targeted Europe-wide approach.

Individually, each country is doing what it can to try to stem the losses and let's hope that the UK's reverse charge mechanism will bite. However, since the fraudsters largely operate by exploiting differences between the tax rules across the EU, such unilateral approaches are likely to fail to wholly address the problem. In the short term, they may reduce the net losses from one country but are unlikely to have a major impact on Europe as a whole.

Shuffling the problem from one member state to another in a bizarre pass-the-parcel game of national nimbyism means, collectively, they all end up losers.

Leaving aside arguments about the relative efficacies of the various mechanisms proposed to combat carousel fraud, they tend to all operate in a similar broad-brush approach, generally applying additional compliance burdens on taxpayers. The effect of this approach is that 'good' and 'bad' taxpayers are hit equally hard and law abiding companies (often already paying large VAT bills) have to jump through extra compliance hoops for the privilege.

Again, taking a slightly wider perspective, it could be argued that such a compliance burden might actually put large, law abiding companies off the idea of doing business in certain member states.

Indeed, administrative changes to enhance exchange of information and mutual co-operation between member states may well be the route to achieving a viable solution rather than far-reaching structural changes to VAT rules.

There's no 'silver bullet' - if it was easy, we wouldn't have a problem. But it's a serious situation and for all our sakes, let's take a targeted approach.

Gary Harley is head of indirect tax at KPMG