Future of reverse charge VAT rocks carousel fraud fight

The future of reverse charge VAT, hailed as the main weapon in the
government’s battle against carousel fraud, was in serious doubt this week as
Germany, Austria and France objected to the UK’s request for the EU to allow it
to implement the new regime on certain products.

HM Revenue & Customs has confirmed
that the objections raised by its EU partners will force it to delay the
original implementation date of 1 December for what has been a highly
controversial set of measures.

It is unclear when the UK will now receive derogation from the EU to go ahead
with the change and it could be months before the matter is resolved.

The delay will be particularly frustrating for the UK authorities, who had
already received the blessing of the European Commission to apply reverse charge
VAT to goods such as mobile telephones, computer chips and microprocessors.

The unanimous approval of the EU’s finance ministers is required for the
final go-ahead, however, and the objections of Germany, Austria and France could
scupper the UK’s attempts to fight carousel fraud, which according to official
figures costs the government up to £1.9bn annually. Other statistics indicate
that the fraud-costs the taxpayer £8.4bn.

Germany and Austria are understood to be blocking the UK’s request because
the EC turned down their request to introduce reverse charge VAT on a far
broader basis earlier this year.

France is against the change because they believe that implementing the
regime in the UK will see carousel fraud migrate across the channel.

An HMRC spokesperson said the government would implement the reverse charge
regime as soon as derogation was agreed, but said that HMRC would not give a
‘running commentary’ on the discussions with its ‘European partners’.

John O’Donnell, tax investigation director at Chiltern, said the objections
from France, Germany and Austria represented ‘bad news’ for the UK’s strategy to
combat carousel fraud, but was hopeful that some agreement could still be

‘This is bad news for both HMRC and the taxpayer alike, however I do not
expect HMRC to give up on their proposal just yet. I would imagine that they
will get approval at some point in the future following some concession and
debate,’ O’Donnell said.

Experts believe that the UK will now have to engage in negotiations and horse
trading with those opposed to the reverse charge request. It is understood that
Germany, for instance, may be willing to support the UK if it can secure backing
for wider application of reverse charge VAT.

The reverse charge uncertainty will not only be frustrating for HMRC. It will
also be a blow for the businesses and accounting software groups that have been
working to meet the 1 December deadline.

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